# 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.

Source: https://lopifi.com/learn/how-startup-books-work
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What kind of accounting does a startup need: cash or accrual?** 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.

| Question | Answer | Where it comes from |
| --- | --- | --- |
| Did we make money? | 1,747.40 | The income statement |
| What did running the business do to cash? | (647.40) | The cash flow statement, operating section |
| What's in the bank? | 35,352.60 | The balance sheet, and the bank statement |

Northwind, September 2026. Accrual basis, USD, one entity.

## Cash or accrual

Two ways of keeping books answer *when does this count?* differently. The [cash basis](https://lopifi.com/md/glossary/cash-basis) counts revenue when cash arrives and costs when cash leaves. The [accrual basis](https://lopifi.com/md/glossary/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.

> “Accrual accounting attempts to record the financial effects on an entity of transactions and other events and circumstances that have cash consequences for the entity in the periods in which those transactions, events, and circumstances occur rather than only in the periods in which cash is received or paid by the entity.”

© Financial Accounting Foundation. All rights reserved.

— [CON 8, Introduction — as amended by Ch. 4, App. A (carrying forward CON 6, ¶139)](https://www.fasb.org/concepts-statements), What accrual accounting is for

*[Figure: accrual vs cash]*

One invoice on two tracks: the month it's earned and the month it's paid. Illustrative amount.

**Cash basis**
- Pro: Simple: the bank statement is nearly the whole record
- Pro: Easy to keep from a bank feed
- Con: Not GAAP. Investors, lenders and acquirers will ask for accrual statements
- Con: 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**
- Pro: US GAAP, so the statements are the ones diligence asks for
- Pro: Matches costs to the revenue they produced, so a month's profit means something
- Con: Needs month-end adjustments: prepaids, accruals, deferred revenue, depreciation
- Con: Profit and cash diverge, so both must be read
- Best for: Every venture-backed company, from the first month

The two bases for a startup's books.

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.

*[Journal entries: JE-12]*

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 following entities generally cannot use the cash method, including any combination of methods that includes the cash method. … A corporation (other than an S corporation). However, see Exceptions below.”

— [IRS Pub. 538 (rev. 01/2022), Cash Method — Excluded Entities](https://www.irs.gov/publications/p538), A C corporation generally cannot use the cash method for tax

## The month, as a loop

Bookkeeping is the same loop every month. Each [Transaction](https://lopifi.com/md/glossary/transaction) becomes a [journal entry](https://lopifi.com/md/glossary/journal-entry) in equal debits and credits ([Double-entry](https://lopifi.com/md/glossary/double-entry)), posted to accounts in a [chart of accounts](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/close).

*[The accounting cycle, at: close]*

The monthly cycle. [[/learn/accounting|The Accounting track]] teaches each stage.

*[Figure: month end close]*

The close as a checklist, station by station. Illustrative close window.

| Step | The bookkeeper | The founder |
| --- | --- | --- |
| Record | Codes every bank and card transaction, enters bills and invoices | Answers "what was this?" for the ones nobody can identify |
| Reconcile | Proves cash, cards, receivables and payables to outside records | Nothing, unless something doesn't tie |
| Adjust | Books prepaids, depreciation, accruals and payroll taxes | Says what was promised but not yet billed |
| Report | Produces the P&L, balance sheet and cash flow | Reads them, and asks why each line moved |
| Lock | Closes the period so nothing changes after it | Signs off |

The close, as a founder takes part in it.

> **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](https://lopifi.com/md/learn/accounting) is this lesson at full depth, on Northwind's September from [Why the books exist](https://lopifi.com/md/learn/why-the-books-exist) through [Cash versus accrual](https://lopifi.com/md/learn/cash-versus-accrual) to [Closing the month](https://lopifi.com/md/learn/closing-the-month). [Burn rate and runway](https://lopifi.com/md/learn/how-to-calculate-burn-rate-and-runway) picks up the cash side from the same books.

## Where this lesson's rules come from

- [CON 8, Introduction — as amended by Ch. 4, App. A (carrying forward CON 6, ¶139)](https://www.fasb.org/concepts-statements) — What accrual accounting is for (concepts)
- [IRS Pub. 538 (rev. 01/2022), Cash Method — Excluded Entities](https://www.irs.gov/publications/p538) — A C corporation generally cannot use the cash method for tax (irs)
- [IRS Publication 538 (rev. 01/2022)](https://www.irs.gov/publications/p538) — Accounting Periods and Methods — cash and accrual (tax)
- [Wikipedia, “Bookkeeping”](https://en.wikipedia.org/wiki/Bookkeeping) — Bookkeeping (reference)

## Read further

- https://lopifi.com/md/journal-entries/customer-deposit
- https://lopifi.com/md/differences/accrual-vs-cash-basis
- https://lopifi.com/md/differences/deferred-revenue-vs-accrued-revenue
- https://lopifi.com/md/startups/cash-vs-accrual-accounting-for-startups
- https://lopifi.com/md/startups/chart-of-accounts-for-startups
- https://lopifi.com/md/startups/general-ledger-and-double-entry
- https://lopifi.com/md/startups/us-gaap-for-startups
- https://lopifi.com/md/startups/why-close-your-books-monthly
- https://lopifi.com/md/accounting/accrual-basis
- https://lopifi.com/md/accounting/chart-of-accounts
- https://lopifi.com/md/accounting/close
- https://lopifi.com/md/accounting/us-gaap
- https://lopifi.com/md/accounting/deferred-revenue
- https://lopifi.com/md/tools/journal
- https://lopifi.com/md/tools/tb
- https://lopifi.com/md/docs/domain/01-accounting-model
- https://lopifi.com/md/docs/domain/02-periods-and-close

- **Track:** [Back office core](https://lopifi.com/md/learn/core)
- **Lesson:** Lesson 4 of 9 — 8 min
- **Terms taught:** [Accrual basis](https://lopifi.com/md/glossary/accrual-basis), [Cash basis](https://lopifi.com/md/glossary/cash-basis), [Transaction](https://lopifi.com/md/glossary/transaction), [Journal entry](https://lopifi.com/md/glossary/journal-entry), [Double-entry](https://lopifi.com/md/glossary/double-entry), [Chart of accounts](https://lopifi.com/md/glossary/chart-of-accounts), [Close](https://lopifi.com/md/glossary/close), [Deferred revenue](https://lopifi.com/md/glossary/deferred-revenue)
- **Previous:** [Company money, kept apart, Core · Lesson 3](https://lopifi.com/md/learn/separate-business-and-personal-money)
- **Next:** [People: employees and contractors, Core · Lesson 5](https://lopifi.com/md/learn/hiring-employees-and-contractors)
- **The course:** https://lopifi.com/md/learn