Also known as Accrual basis vs cash basis
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves.
Key takeaways
Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash moves. Cash accounting records them only when money actually changes hands. Accrual gives a truer picture of a startup's economics, which is why ASC 606, GAAP, and most VCs require it for funded companies.
Bill a customer $12K in March, collect in May. Accrual books $12K revenue in March; cash books it in May.
| Accrual basis | Cash basis | |
|---|---|---|
| Records revenue | When earned (invoice sent) | When cash is received |
| Records expenses | When incurred (bill received) | When cash is paid |
| Shows AR / AP | Yes | No |
| GAAP / ASC 606 | Compliant | Not compliant |
| Best for | Funded startups, investor reporting | Very early, pre-revenue projects |
Cash-basis books hide real burn and revenue timing, distorting margins and runway. Funded startups need accrual to pass diligence, satisfy ASC 606, and give investors board-ready numbers. Most VCs and auditors will not accept cash-basis financials at seed or Series A.