When setting up the books for a new company, most accounting systems make you choose between cash and accrual accounting. This is an important financial decision that founders shouldn’t take lightly, especially if they’re planning to seek outside investment.
The short answer? You probably want to operate your startup’s books using accrual accounting so you don’t have to convert your historical books from cash basis to accrual basis in the future, eating up a lot of time and organizational effort.
Read on to learn more about the differences and why investors favor accrual accounting.
TLDR:
Cash accounting recognizes income or expenses when they are received or paid out, whereas accrual accounting recognizes revenue when it’s actually earned and expenses when they’re actually incurred. It’s tempting to use cash accounting because it’s often simpler, cheaper, and more intuitive.
The accrual method requires additional effort from a bookkeeper, so it can be more expensive upfront and lead founders to choose the cash method.
| Cash Accounting | Accrual Accounting | |
|---|---|---|
| When revenue is recorded | When cash is received | When revenue is earned |
| When expenses are recorded | When cash is paid out | When expenses are incurred |
| Complexity & cost | Simpler and cheaper upfront | More effort; higher bookkeeping cost |
| Business health picture | Sporadic — mirrors cash flow | Smoother; predicts future outcomes |
| Investor expectations | Not preferred; limits comparability | Preferred; enables apples-to-apples comparison |
| Audit readiness | Not suitable for audits | Required for audits |
| IRS threshold (2026) | Allowed below $31M avg. gross receipts | Required above $31M avg. gross receipts |
But …
Converting to the accrual method in the future will be much more costly, and most venture-backed startups will need accrual accounting to meet investor expectations. Some later-stage investors require it, and it’s becoming more common amongst earlier-stage investors, too.
When comparing financials from one startup to another, investors want metrics that are calculated using a consistent accounting method. Otherwise, these metrics do not allow for useful comparison. As Burkland Associates notes, VCs don't necessarily require strict GAAP — but they do expect financials that are credible, consistent, and grounded in accrual accounting.
Some people would argue that accrual accounting also provides a truer sense of “business health” than cash accounting because cash collections and payments can be sporadic. Accrual accounting smooths this out to show more consistent trends and predict future financial outcomes.
Plus, if clients, investors, or regulators (like those in the fintech space) require you to get an audit, you’ll need to use accrual accounting. And if there’s a chance (or ambition) that your company will generate $26 million in revenue per year, the IRS will require accruals for tax filings. Down the line, if your startup gets acquired by another company, that company will expect accrual accounting, too.
Early-stage startups can keep their monthly accounting on a cash basis. This is cheaper and more intuitive to record. ****At the end of the year, you can adjust your cash basis financials to the accrual method. Common accrual adjustments include depreciation of assets (like computers), deferred payroll and benefits, deferred revenue (for example, if your customers prepay for a yearly subscription), and prepaid expenses. Rather than calculating and recording these adjustments each month, you can calculate it once a year, as long as the size and number of adjustments are manageable.
One update worth knowing: the IRS gross receipts threshold has been inflation-adjusted. For the 2026 tax year, businesses can use the cash method as long as their average annual gross receipts over the prior three years don't exceed $32 million — up from the $25 million figure that applied when the Tax Cuts and Jobs Act first set the rule, per IRS Rev. Proc. 2025-32. If you're an early-stage startup well below that ceiling, you still have flexibility. But the same logic applies: if you're building toward Series A or beyond, setting up accrual accounting now is far cheaper than converting later. Investors expect it, and the window to do it cleanly narrows as your transaction volume grows.
With legacy accounting software like Quickbooks, you have to choose cash or accrual accounting, and founders typically want both, because cash is especially relevant to founders. Even if they use accruals for taxes, fundraising, and managing other parts of the business, they will likely want to monitor cash activity. That’s where Puzzle.io can help.
Puzzle is an accounting system built by and for founders and finance teams. The Cash Activity Report shows you your cash, burn, and transaction details as they happen in real-time. You can also get cash basis books and accrual basis books with embedded schedules, for full traceability, auditability, and accuracy. Get started at Puzzle.io.
The moment you incorporate. Before you have revenue, your cap table, equity issuances, and bank account are already creating accounting events. Tracking those accurately from day one is far cheaper than reconstructing them later — especially if an investor asks for clean books during due diligence and you're starting from a spreadsheet. Early-stage accounting software also gives you a real-time view of burn rate and runway, which are the two numbers every pre-revenue founder actually needs to manage. Setting up accrual-basis books now means you're not paying a bookkeeper (or a lawyer) to clean up a mess when you're trying to close a round.
For Series A, you need accrual-basis books, a clean audit trail, and the ability to produce a GAAP income statement, balance sheet, and cash flow statement on demand. Legacy tools like QuickBooks Online can technically produce these reports, but they require significant manual configuration and often break down when investors start asking for revenue recognition schedules or deferred revenue waterfall views.
Puzzle is built for exactly this stage: it maintains both cash and accrual books simultaneously, embeds schedules directly in the financials for full traceability, and produces the investor-ready reports VCs expect — without a controller-level hire. If you're approaching a Series A and your books are still on cash basis, the time to convert is now, before your transaction volume compounds the cleanup cost.
Most accounting software is designed for small businesses or large enterprises — not the specific operating reality of a seed or Series A startup burning through a runway with a three-person team. Puzzle was built by and for founders, with YC-backed companies among its earliest users. It integrates natively with the tools accelerator-backed startups actually use — Mercury, Brex, Ramp, Stripe, Gusto — and surfaces the metrics that matter at that stage: burn rate, runway, and month-over-month ARR, updated daily. You get accrual books that satisfy investor diligence alongside a real-time cash activity view that keeps the founding team oriented — without paying for an ERP built for problems you don't have yet.
Payroll is one of the most common accrual adjustments for early-stage startups: wages earned but not yet paid at month-end need to hit your books as an accrued liability, not just when the wire clears. With Gusto or Rippling, both platforms can export payroll journal entries — but in most legacy accounting tools, you're still mapping those exports manually, matching accounts, and reconciling benefits, employer taxes, and net pay line by line.
Puzzle's native integrations with Gusto and Rippling automatically pull payroll runs and post the corresponding journal entries — including deferred payroll, employer tax liabilities, and benefits — directly to your general ledger. The result is an accrual-accurate payroll expense that hits your books the period it was earned, with a full audit trail, without manual data entry.
The core problem with cash accounting is that your P&L only updates when money moves — so if a client owes you $50,000 or you've incurred a liability that hasn't been invoiced yet, your books don't reflect it. Accrual accounting fixes this: revenue is recognized when earned and expenses when incurred, so your P&L reflects the actual state of the business in real time.
With Puzzle, your books update daily — not at month-end when your accountant gets around to it. The Cash Activity Report shows live burn and transaction detail, while the accrual-basis P&L gives you the GAAP-accurate picture investors and auditors need. You don't have to choose between the two views, and you don't have to wait for anyone to generate them.
Payroll is one of the most common accrual adjustments for early-stage startups: wages earned but not yet paid at month-end need to hit your books as an accrued liability, not just when the wire clears. With Gusto or Rippling, both platforms can export payroll journal entries — but in most legacy accounting tools, you're still mapping those exports manually, matching accounts, and reconciling benefits, employer taxes, and net pay line by line.
Puzzle's native integrations with Gusto and Rippling automatically pull payroll runs and post the corresponding journal entries — including deferred payroll, employer tax liabilities, and benefits — directly to your general ledger. The result is an accrual-accurate payroll expense that hits your books the period it was earned, with a full audit trail, without manual data entry.
