1. Accrual basis
Revenue is recorded when it’s earned and expenses when they’re incurred, not when cash moves. An annual contract paid in January is recognized across twelve months; December’s cloud bill belongs to December even if it’s paid in January. This single change is what makes monthly numbers comparable.
In figures: a $24,000 annual contract paid on January 2 is $24,000 of January revenue on a cash basis and nothing for the rest of the year. On an accrual basis it is $2,000 in each of the twelve months, and on January 31 the other $22,000 sits on the balance sheet as deferred revenue.
On cash basis January looks like a great month and the other eleven look worse than they are. Accrual is what makes one month comparable with the next.
2. Revenue recognition (ASC 606)
Revenue is recognized as you satisfy performance obligations to the customer. For a typical SaaS subscription that means ratably over the service period, with anything billed in advance sitting in deferred revenue until it’s earned. Setup fees, usage-based pricing, multi-year deals and bundled services each need a decision, and the decision should be written down once and applied the same way every month.
3. Leases (ASC 842)
Leases longer than twelve months go on the balance sheet: a right-of-use asset and a lease liability, measured at the present value of the remaining payments. For an operating lease the expense is generally straight-line over the term; the schedule behind it tracks the liability unwinding and the asset amortizing, which move on different curves. Office leases, and some equipment and data-center contracts, are where this shows up first.
Two simplifications matter to a startup. Leases of twelve months or less can be kept off the balance sheet by policy election and simply expensed. And a private company that doesn’t know its incremental borrowing rate may elect to discount at the risk-free rate for the lease term instead, which is easier to support but produces a larger liability.
4. Stock-based compensation (ASC 718)
Options and RSUs granted to employees are an expense, measured at grant-date fair value and recognized over the vesting period. It’s non-cash, which is why it’s easy to skip, and why diligence notices when it’s missing. Your 409A valuation and cap table software provide the inputs.
A private company gets practical help with the inputs: it may use a reasonable valuation, such as its 409A, as the current share price, and an industry index for volatility when it has no trading history of its own. What it can’t do is leave the expense out.
5. Internal-use software (ASC 350-40)
Some costs of building software for internal use, including a SaaS platform customers access but never take a copy of, can be capitalized and then amortized over the software’s useful life. Under the current guidance capitalization starts at the application development stage, once the preliminary planning is done, management has committed the funding and completion is probable; planning, training and maintenance are expensed. Software sold or licensed to customers to install falls under a different standard (ASC 985-20).
The FASB rewrote this in ASU 2025-06, effective for annual periods beginning after December 15, 2027, with early adoption allowed. It drops the project stages: costs are capitalized once management has authorized and committed to funding the project and it’s probable to be completed, which is not the case while significant development uncertainty remains, such as novel features not yet resolved by coding and testing. Either way it’s a judgment that should be documented, because it changes both your P&L and your balance sheet.
Common questions
Are private startups required to follow US GAAP?
There’s no general legal requirement for a private company to prepare GAAP statements. In practice, investors, lenders and auditors ask for them, and converting from cash-basis books later is expensive. Most venture-backed companies keep accrual, GAAP-basis books from early on.
Is GAAP the same as what I file with the IRS?
No. Tax rules and GAAP differ in many places, among them depreciation, stock compensation, R&D costs and revenue timing. Good books follow GAAP and track the differences so the tax return can be prepared from them.
Are there simpler GAAP rules for private companies?
Some. The FASB’s Private Company Council has added a set of alternatives a private company may elect: discounting leases at a risk-free rate instead of a borrowing rate it doesn’t have, using a 409A-style valuation as the share price for stock compensation, and amortizing goodwill rather than testing it each year, among others. Each is an election, and it’s disclosed.
Which standard should I deal with first?
Accrual basis on day one, revenue recognition with your first customer contract, stock compensation with your first option grant, and leases with your first office lease over twelve months. Capitalized software is the one most early companies can defer thinking about until engineering spend is large enough to matter.
Deciding who keeps your books? Pilot vs Lopifi: startup bookkeeping compared · inDinero vs Lopifi: outsourced accounting
Terms in this guide
Each one has its own page in the founder glossary. Hover for the short version, or open the full entry.
- US GAAPUS GAAP · ASC 105-10
- Accrual basisUS GAAP · CON 8
- Balance sheetUS GAAP · ASC 210
- Deferred revenueUS GAAP · ASC 606
- LeasesUS GAAP · ASC 842
- 409A valuationEquity · IRC § 409A
- Cap tableEquity · Convention
- Income statementUS GAAP · ASC 220
- Revenue recognitionUS GAAP · ASC 606
- Capitalized softwareUS GAAP · ASC 350-40
Keep going
From here: a free tool to try it on your own numbers, the lesson behind it and the state guides that cite it.
- Free toolPrepaid & deferred releaseA premium paid on the 17th does not release in twelve equal slices. Day-weighted, or even — your call.
- Free toolLease — ASC 842 / IFRS 16PV of the payments at your IBR, the liability unwind and the ROU asset — straight-line for a finance lease, the plug to a level cost for an operating one.
- Lesson 8 · 9 minCash, accrual and cut-offCash accounting records when money moves. Accrual records when value moves. Every hard question in the rest of the course lives in the gap between the two.
- State guides · cited in 51 statesFederal accounting for startupsFederal law sets the tax rules, not the bookkeeping ones: US GAAP comes from the FASB and from what investors expect, while Form 1120, the cash-method test and Section 174 come from the IRS. Every state builds its corporate tax on this return.
Want this handled without thinking about it?
Lopifi is building AI bookkeeping that keeps your books closed on US GAAP as transactions happen, watches deadlines like the ones above, and has a CPA review everything each quarter, for $200 a month. We’re not open yet.
More founder guides
- The closeWhy 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.
- RevenueDeferred revenue for SaaS startups, explainedAn annual prepayment is cash today and revenue over a year. How deferred revenue works under ASC 606, why it’s a liability, and the schedule behind it.
- FundraisingAudit-ready books before your Series AInvestors, lenders and auditors ask for the same things: accrual statements, reconciled accounts and support for every balance. How to be ready first.
- ComplianceFirst-year compliance calendar for a Delaware C-corpDelaware franchise tax, 1099s, the federal return, payroll filings, state annual reports and sales tax: the deadlines a young C-corp misses most, by month.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA before you act on them.