The books, in one lesson
Startup books are accrual books, closed every month. Profit, operating cash and the bank balance are three different numbers, and the books show all three.
At the end of September, Northwind's books say three things that sound like they contradict each other. It made a profit of $1,747.40. Its operations used $647.40 of cash. And it has $35,352.60 in the bank. All three are right, and a founder who can explain why reads their own company better than most.
Cash or accrual
Two ways of keeping books answer when does this count? differently. The cash basis counts revenue when cash arrives and costs when cash leaves. The accrual basis counts revenue when it's earned and costs when they're incurred, whenever the cash moves. US GAAP is accrual, and so is every set of statements an investor, a lender or an acquirer will ask for.
Cash basis
- Good at
- Simple: the bank statement is nearly the whole record
- Easy to keep from a bank feed
- Watch for
- Not GAAP. Investors, lenders and acquirers will ask for accrual statements
- Shows when cash moved, not whether the month made money
- Best for
- A very small business with no inventory, no receivables and no outside investors
Accrual basis
- Good at
- US GAAP, so the statements are the ones diligence asks for
- Matches costs to the revenue they produced, so a month's profit means something
- Watch for
- Needs month-end adjustments: prepaids, accruals, deferred revenue, depreciation
- Profit and cash diverge, so both must be read
- Best for
- Every venture-backed company, from the first month
Northwind's deposit shows the difference. A customer paid $3,000 on September 26 for goods to be delivered in October. On the cash basis that's September revenue. On the accrual basis it's a liability, because Northwind owes the goods, and it becomes revenue in October when they're delivered.
A customer pays a $3,000 deposit for goods to be delivered in October.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 3,000.00 | |
| 2400Deferred revenue | 3,000.00 | |
| Balanced | 3,000.00 | 3,000.00 |
Cash in the bank that is not revenue. Northwind owes goods, so the credit is a liability — deferred revenue — and it stays one until October's delivery earns it.
JE-12: cash in the bank that isn't revenue yet.
Tax is a separate question with its own rules. A C corporation generally can't use the cash method for its federal return unless it meets a gross receipts test, set in dollars and indexed for inflation. Either way, the books are kept on the accrual basis, and the CPA works out the tax basis from them at year end.
The month, as a loop
Bookkeeping is the same loop every month. Each transaction becomes a journal entry in equal debits and credits (double-entry), posted to accounts in a chart of accounts. The accounts are proved, adjusted for what was used but never billed, turned into three statements and locked. That last step is the close.
- Something happens
- Journal
- Ledger
- Trial balance
- Adjust
- Statements
- This stageCloseReconciled, tied out, signed off.
Profit says whether the business earned money. Cash says whether it can keep going. The accrual books show both, and only the accrual books do.
Where this goes next: the Accounting track is this lesson at full depth, on Northwind's September from Why the books exist through Cash versus accrual to Closing the month. Burn rate and runway picks up the cash side from the same books.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- IRS guidance
- IRS Pub. 538 (rev. 01/2022), Cash Method — Excluded Entities (opens in a new tab)A C corporation generally cannot use the cash method for taxFree to read
- Tax — not GAAP
- IRS Publication 538 (rev. 01/2022) (opens in a new tab)Accounting Periods and Methods — cash and accrualFree to read
- Conceptual framework
- CON 8, Introduction — as amended by Ch. 4, App. A (carrying forward CON 6, ¶139) (opens in a new tab)What accrual accounting is forFree to read
- Background reading — not an authority
- Wikipedia, “Bookkeeping” (opens in a new tab)BookkeepingFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Accrual basisRecognizing revenue when earned and expense when incurred, regardless of when cash moves
- Cash basisRecognizing revenue and expense only when cash moves. Not GAAP for any entity — it is a special purpose framework (AICPA AU-C 800), and for tax a method IRS Pub. 538 and IRC §448 limit by entity type and gross receiptsConvention
- TransactionA business event — a payment, a sale, a purchaseConvention
- Journal entryA balanced set of debit and credit lines posted to the GLConvention
- Double-entryRecording every transaction as equal debits and credits, so the ledger proves itselfConvention
- Chart of accountsThe account structureConvention
- CloseThe process of finalizing a periodConvention
- Deferred revenueConsideration received, or unconditionally due, before the goods or services are transferred — a liability until the performance obligation is satisfied. ASC 606 calls it a contract liability
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- The accounting modelEvery Lopifi component sits on one data model, and if the model is wrong no amount of design saves the product. This page defines it, from the journal line up to basis and materiality.
- Periods & the closeThe month-end close in accounting software: fiscal calendars, period states, cutoff, reconciliation vs tie-out, adjusting entries and restatement.
- Journal entry balancerPaste an entry, see what it's out by, and copy the lines back out.
- Trial balance checkerCheck a trial balance ties, flag wrong-side balances and see what it rolls up to.
- Journal entry for a customer depositWhen a customer pays a deposit, debit Cash and credit Customer deposits. On delivery, debit Customer deposits for the deposit, debit Accounts receivable for the balance, and credit Revenue for the full price.
- Accrual basis vs cash basisCash basis books revenue and expenses when money moves. Accrual books them when they're earned or incurred, so a year of insurance paid up front is one month's expense on cash basis and a twelfth a month on accrual.
- Deferred revenue vs accrued revenueBilling or collecting ahead of the work creates deferred revenue, a liability. Doing the work ahead of the bill creates accrued revenue, an asset.
- Cash vs accrual accounting for startups, and the IRS ruleCash or accrual for a startup: why investors and auditors read accrual, when the IRS lets a C-corp file on cash, and the 2026 gross receipts limit.
- Chart of accounts for startups: a starting templateA starting chart of accounts for a US startup: number ranges, the expense accounts you need, and when to add an account versus a class or tracking tag.
- General ledger and double-entry bookkeeping, explainedHow double entry works: journal entries, debits and credits, normal balances, running balances, the trial balance, and why posted entries are reversed.
- US GAAP for early-stage startups, in plain EnglishAccrual accounting, revenue recognition (ASC 606), leases (ASC 842), stock compensation and capitalized software: what each means for a small company.
- Why startups should close their books every monthA monthly close turns a bank balance into numbers an investor, an auditor or a 409A firm will accept. What it is, and why it gets expensive to skip.