Startup Accounting FAQ: Bookkeeping Basics Explained
Everything founders need to know about startup accounting—from choosing between cash and accrual to understanding revenue recognition and preparing for audits. Plain English explanations.
Accounting Basics
What is the difference between cash and accrual accounting?
Cash accounting records transactions when money changes hands. Accrual accounting records when transactions are earned or incurred, regardless of cash timing. A December sale paid in January is December revenue under accrual, January under cash. Accrual gives a truer picture of business performance and is required by GAAP.
When should I switch from cash to accrual accounting?
Switch to accrual when: raising institutional funding (VCs require GAAP), revenue exceeds $1M, you have significant deferred revenue or prepaid expenses, or you need accurate period-matching. Most startups should switch by Series A. The transition requires adjusting opening balances.
What is a chart of accounts and how should I structure it?
A chart of accounts is the complete list of accounts used to record transactions, organized into: Assets, Liabilities, Equity, Revenue, and Expenses. Keep it simple—overly detailed charts create maintenance burden. Standard categories: Cash, AR, Prepaids (assets); AP, Deferred Revenue, Debt (liabilities); Revenue by type; COGS, R&D, S&M, G&A (expenses).
What is GAAP and when do I need to follow it?
GAAP (Generally Accepted Accounting Principles) are standardized US accounting rules. Follow GAAP when: raising institutional funding, preparing for audit, reporting to board/investors, or planning exit. Early-stage companies often start with cash basis but must transition. International companies may use IFRS instead.
What is double-entry bookkeeping?
Every transaction affects at least two accounts—debits must equal credits. Receiving cash increases Cash (debit) and increases Revenue (credit). Paying rent decreases Cash (credit) and increases Expense (debit). This system catches errors and maintains the accounting equation: Assets = Liabilities + Equity.
What's the difference between bookkeeper, accountant, and controller?
A bookkeeper records transactions and reconciles accounts (entry-level, $30-60K). An accountant prepares financials and handles tax compliance (CPA helpful, $50-90K). A controller manages the accounting function, builds processes, and handles audits (CPA required, $100-180K). Most startups outsource bookkeeping, then hire a controller at Series A.
Revenue Recognition
How does revenue recognition work for SaaS?
SaaS revenue is recognized ratably over the service period per ASC 606. A $12K annual contract paid upfront becomes $1K/month in recognized revenue. The unearned portion sits in Deferred Revenue (liability) until recognized. Professional services revenue is recognized when delivered.
What is deferred revenue?
Deferred revenue is payment received for services not yet delivered—a liability because you owe the service. When you collect a $12K annual subscription upfront, the full amount is deferred revenue, reducing by $1K monthly as you recognize revenue. Critical for cash flow planning and accurate P&L.
How do I handle multi-year contracts?
For multi-year contracts, recognize revenue ratably over the contract term. A 3-year, $360K contract recognizes $10K/month for 36 months. Prepayments become deferred revenue. If there are price escalations, spread them ratably unless they represent distinct services.
What is ASC 606 and why does it matter?
ASC 606 is the revenue recognition standard (since 2018) requiring companies to recognize revenue when performance obligations are satisfied. Five steps: identify contract, identify obligations, determine price, allocate price to obligations, recognize when obligations met. Affects how you account for bundles, discounts, and services.
How do I recognize professional services revenue?
Professional services (implementation, consulting) are recognized as services are delivered. Fixed-fee projects: use percentage of completion or when milestones are achieved. Hourly/T&M: recognize as hours are worked. Separate from subscription revenue if distinct; bundle if not separable.
What are the common revenue recognition mistakes?
Common mistakes: recognizing annual contracts upfront (should be monthly), mixing bookings and revenue, not tracking deferred revenue properly, bundling distinct services incorrectly, and recognizing before delivery. These create audit issues and misinform decision-making.
Financial Statements
What are the three main financial statements?
Income Statement (P&L) shows revenue, expenses, and profit/loss over a period. Balance Sheet shows assets, liabilities, and equity at a point in time. Cash Flow Statement shows cash movements from operations, investing, and financing. Together they tell your complete financial story.
What should an income statement show?
Revenue (by type), Cost of Goods Sold (hosting, support), Gross Profit, Operating Expenses by category (R&D, S&M, G&A), Operating Income, Other Income/Expense (interest), Net Income. Show actual vs. budget, current period vs. prior period. Include key metrics like gross margin %.
What belongs on the balance sheet?
Assets: Cash, Accounts Receivable, Prepaid Expenses, Fixed Assets. Liabilities: Accounts Payable, Deferred Revenue, Accrued Expenses, Debt. Equity: Common Stock, Preferred Stock, Additional Paid-In Capital, Retained Earnings. Assets always equal Liabilities plus Equity.
How does the cash flow statement work?
Three sections: Operating (cash from business operations, starts with net income and adjusts for non-cash items), Investing (capex, acquisitions), Financing (fundraising, debt, dividends). The sum equals change in cash. Critical for understanding why cash differs from profit.
What is the difference between profit and cash flow?
Profit is revenue minus expenses per accounting rules. Cash flow is actual money in and out. They differ due to: timing (revenue recognized before cash received), non-cash items (depreciation, stock comp), and balance sheet movements (inventory, deferred revenue). Profitable companies can run out of cash.
What other reports should I track?
Beyond core statements: AR Aging (who owes you, how long), AP Aging (what you owe), Departmental P&L (spending by team), Budget vs. Actual, Cash Forecast, Metrics Dashboard. Frequency: monthly statements, weekly cash tracking at minimum.
Processes & Controls
What is a monthly close process?
Monthly close finalizes financials for a period. Steps: reconcile all bank accounts, update AR/AP, record accruals (expenses incurred not yet invoiced), verify deferred revenue, record depreciation/stock comp, review for errors, generate financial statements. Target: close within 10-15 business days of month end.
What is a bank reconciliation and how often should I do it?
Bank reconciliation matches your book balance to the bank statement, identifying outstanding checks, deposits in transit, and errors. Do it monthly at minimum—weekly for high transaction volume. Unreconciled accounts indicate sloppy processes and hide potential fraud or errors.
What are internal controls and why do they matter?
Internal controls are processes that prevent errors and fraud: segregation of duties (different people authorize and pay), approval workflows, access restrictions, reconciliations, and audit trails. Even small startups need basic controls. They become critical for SOC 2 and audits.
How should I handle expense management?
Use a system (Brex, Ramp, Expensify) not manual reimbursements. Set policies for approval thresholds, allowed categories, and receipt requirements. Auto-categorize expenses for accounting. Review monthly for policy compliance and proper coding. Keep receipts for 7 years.
When should I use accounting software vs. spreadsheets?
Use real accounting software (QuickBooks, Xero) from day one—it's cheap and avoids errors. Spreadsheets lack audit trails, break with complexity, and waste time. At $2M+ revenue or Series A, consider NetSuite or similar for multi-entity and advanced reporting.
How do I handle accounts receivable?
Invoice promptly upon delivery/contract signature. Set clear payment terms (Net 30 typical, Net 15 for smaller customers). Follow up on overdue invoices weekly. Monitor DSO (Days Sales Outstanding)—target under 45 days. Build aging reports to identify collection risks early.
Audits & Compliance
When do I need a financial statement audit?
You need an audit when: raising Series B+ (often required), revenue exceeds $10-20M, enterprise customers require it, entering regulated industries (fintech, healthcare), or planning IPO/exit. Some debt covenants also require audited financials. Plan 6+ months ahead.
What does an audit involve?
Auditors verify your financials are materially correct. They test transactions, confirm balances with third parties, review revenue recognition, check internal controls, and issue an opinion. Preparation: clean books, organized documentation, responsive controller. Duration: 2-3 months. Cost: $25K-150K+.
How do I prepare for my first audit?
Start 6 months early. Ensure: monthly closes are timely and accurate, all reconciliations are current, documentation supports major transactions, revenue recognition follows ASC 606, equity transactions are properly recorded. Fix known issues before auditors arrive. Messy books delay audits and increase costs.
What is the difference between a review and an audit?
A review provides limited assurance—accountants perform analytical procedures and inquiries but no testing. Cost: $5K-20K. An audit provides reasonable assurance through detailed testing. Cost: $25K-150K+. Most investors require audits; reviews may satisfy some lenders or smaller investors.
How do I handle equity accounting?
Stock options require ASC 718 accounting: expense recognized over vesting period based on grant-date fair value (from 409A valuation). Record monthly expense with offset to APIC. Track grants, exercises, and cancellations in cap table software. This creates non-cash expense that reduces GAAP profit.
What records should I keep and for how long?
Keep for 7 years: tax returns, bank statements, invoices, receipts, payroll records, contracts, financial statements. Keep indefinitely: incorporation documents, board minutes, stock ledger, IP assignments. Use cloud storage with backup. Organized records make audits manageable and support tax positions.
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