Cash accounting records money when it moves. Accrual accounting records it when it is earned or owed. Most startups run on cash in the first months, and most move to accrual by the time they raise an institutional round or take on a lender.
The short answer
- Cash basis: revenue counts when the customer pays you, and an expense counts when you pay it.
- Accrual basis: revenue counts when you earn it, and an expense counts when you incur it, whatever the date of the payment.
- Switch to accrual when you raise from investors, borrow, get audited, bill customers in advance, or owe vendors more than a month at a time. GAAP, the standard behind audited financials, is built on accrual.
- Cash can stay while you are pre-revenue, owner-funded, and the books have no outside reader. A cash view of the bank balance stays useful even after you switch.
What each method records
The two methods agree on a purchase made with cash on the spot. They differ whenever the money and the work land in different months, which is most of the time in a company with customers, vendors and payroll.
| What happens | Cash basis | Accrual basis |
|---|---|---|
| A customer pays $12,000 on January 1 for a 12-month contract | Revenue of $12,000 in January | Revenue of $1,000 a month, with the unearned part held as deferred revenue |
| You pay $6,000 on January 1 for a year of insurance | Expense of $6,000 in January | Expense of $500 a month, with the unused part held as a prepaid asset |
| A vendor sends a $3,000 bill on January 28, and you pay it on February 10 | Expense in February | Expense in January, with the amount owed shown as accounts payable |
| You send a $5,000 invoice in March, and the customer pays in April | Revenue in April | Revenue in March, with the amount due shown as accounts receivable |
| Your last three days of payroll fall in one month and are paid in the next | Expense in the month paid | Expense in the month worked, with the amount owed shown as accrued wages |
A worked example: one contract, one policy, one quarter
Take the first two rows of the table and look at the first quarter of the year. The company has no other activity.
| Cash basis | Accrual basis | |
|---|---|---|
| Revenue from the $12,000 contract | $12,000 (all in January) | $3,000 ($1,000 each month) |
| Insurance expense on the $6,000 policy | $6,000 (all in January) | $1,500 ($500 each month) |
| Profit for the quarter | $6,000 | $1,500 |
| January alone | $6,000 profit | $500 profit |
| February alone | $0 | $500 profit |
Cash-basis books show a strong January and two empty months. Accrual books show $500 of profit every month, which matches what the company is doing: delivering a service all year and using the insurance all year. An investor asking "what is your monthly profit?" or "what is your recurring revenue?" gets a useful answer from the accrual books and a lumpy one from the cash books.
Why accrual matters once you raise or borrow
- GAAP is an accrual standard. Audited financial statements, and the revenue recognition rule behind them (ASC 606), are built on accrual. If an investor, lender or acquirer wants GAAP-style financials, the books need to be accrual.
- The metrics need it. Burn rate, gross margin, monthly recurring revenue and runway all depend on revenue and cost landing in the right month. An annual prepayment booked as one month of revenue distorts all four.
- Diligence reads the books. A buyer or investor reviewing a company asks for accrual-basis statements and a trial balance, and reconstructing them later costs more than keeping them from the start.
When cash is fine
Cash basis works for a company that is pre-revenue or early, funded by its owners, with no outside reader of the books, few customers on credit and few vendors on terms. In that setting the bank balance tells most of the story. Even then, many founders start accrual early, because switching later means rebuilding the opening balances for receivables, payables, deferred revenue and prepaids.
Tax method is a separate decision
The method on your books and the method on your tax return do not have to match. Under IRC section 448, C corporations, and partnerships that have a C corporation as a partner, can use the cash method for tax while their average annual gross receipts over the three prior years stay at or below an inflation-adjusted limit: $32 million for tax years beginning in 2026. Other entity types have their own rules, and a company with inventory has further rules.
Changing the tax method generally means filing Form 3115, Application for Change in Accounting Method, with the IRS. A company can keep accrual books for investors and file on the cash method where the rules allow it.
Signs it is time to switch
- You are preparing for a seed, Series A or later round, or an investor asked for GAAP financials.
- You bill annually or quarterly in advance, so cash receipts and earned revenue no longer match.
- You pay vendors on terms, or have prepaid annual contracts such as insurance and software.
- A bank, lender or auditor is asking for accrual statements.
- Your monthly profit swings month to month for reasons unrelated to how the business is doing.
- You are adding a finance hire or a fractional CFO, who will want receivables, payables and deferred revenue on the books.
How to switch from cash to accrual
- 1
Pick a cutover date
Start at the first day of a month, and a quarter or year start is easier to explain. Everything before it stays as it is, or is restated if an investor needs prior periods.
- 2
Collect the balances at the cutover
List every unpaid customer invoice, every unpaid vendor bill, every prepaid contract with the months remaining, every customer payment received for service not yet delivered, and any wages or other costs earned but unpaid.
- 3
Book the opening entries
Post each item to its balance sheet account: accounts receivable, accounts payable, prepaid expenses, deferred revenue and accrued liabilities, with the offset to equity. Keep the support for each, because an auditor will ask for it.
- 4
Set up the recurring schedules
Each prepaid contract gets an amortization schedule, and each multi-month contract a revenue schedule. Fixed assets get a depreciation schedule. See the prepaid expense amortization guide for the method.
- 5
Close the first accrual month and tie it out
Reconcile the bank, check that receivables and payables match their subledgers, and compare the statements against the old cash view. The month-end close checklist lists the checks in order.
- 6
Confirm the tax method with your preparer
Decide whether the return stays on the cash method where allowed, and whether anything needs to be filed.
What accrual adds to the books
- Accounts receivable
- Money customers owe you for work already delivered and invoiced.
- Accounts payable
- Money you owe vendors for bills received and not yet paid.
- Deferred revenue
- Cash received for service you still owe. It becomes revenue as you deliver.
- Prepaid expenses
- Cash paid for something you will use over several months, such as annual insurance or software. It becomes an expense month by month.
- Accrued expenses
- Costs you have incurred and not yet been billed for or paid, such as wages for the last days of the month.
- Fixed assets and depreciation
- Equipment and similar purchases that are spread over their useful life.
How Numbrr handles it
Numbrr keeps accrual-basis books on every plan. Bank and card transactions are categorized and reconciled automatically, and the profit and loss, balance sheet and cash flow statement stay current. Numbrr One adds the accrual suite: invoicing and accounts receivable, bills and accounts payable, revenue recognition (ASC 606), prepaid expense schedules, fixed assets and accrued expenses. Starter keeps accrual-basis books without some of those accrual features, such as revenue recognition.
If you are on QuickBooks Online, connecting it is one step in onboarding, and Numbrr imports your history. Catch-up bookkeeping for earlier months is included on every plan. Numbrr works for US companies in US dollars. It does not run payroll yet and has no inventory module, so a company that depends on either will need another tool beside it. See how it works.
What is the difference between cash and accrual accounting?
Cash accounting records revenue and expenses when money changes hands. Accrual accounting records them when they are earned or incurred, whether or not any money has moved. The same business shows different monthly profit under each method, and the two agree over the full life of a contract.
Do I need accrual accounting before I raise a seed round?
It depends on the investor. Many seed investors accept cash-basis books with a clear bridge to accrual. Series A and later rounds, bank loans and audits generally expect accrual-basis, GAAP-style financials. Check the investor's diligence list. Rebuilding the books later costs more than keeping them accrual from early on.
Is accrual accounting required by law?
GAAP is a standard, and investors, lenders and auditors can require it. Tax law limits the cash method for some taxpayers: C corporations, and partnerships with a C corporation partner, generally can use it only while their average gross receipts over the three prior years are at or below an inflation-adjusted limit, which is $32 million for 2026. Other entity types and companies with inventory have their own rules, so ask your tax preparer.
Can I use cash basis for taxes and accrual for my books?
Often yes, where the tax rules allow the cash method for your entity and size. Many companies keep accrual books for investors and file on the cash method. Changing the tax method generally means filing Form 3115 with the IRS, so confirm with your tax preparer first.
How does accrual accounting treat an annual subscription paid up front?
The payment is recorded as deferred revenue, and one twelfth moves into revenue each month as the service is delivered. A $12,000 annual contract paid in January shows $1,000 of revenue a month, where cash accounting shows $12,000 in January and nothing after.
How long does it take to switch from cash to accrual?
It depends on how many unpaid invoices, unpaid bills, prepaid contracts and customer prepayments exist at the cutover date, because each needs an opening entry and support. A company with few of them has little to enter. Starting at the first of a month keeps it clean.
Does Numbrr use accrual or cash accounting?
Accrual, on every plan. Starter keeps accrual-basis books without some accrual features such as revenue recognition, and Numbrr One and above add the full accrual suite. The cash flow statement still shows the cash view.