Cash vs accrual: when to switch and how to do it

Most startups begin on cash-basis books because cash-basis is simpler. Revenue is whenever cash arrives, expense is whenever cash leaves. The simplicity is real. It is also wrong for any business with material timing differences between economic activity and cash movement.

When cash-basis stops being good enough

• Customers prepay for periods longer than a month.
• Material expenses are paid in advance (annual SaaS subscriptions, prepaid rent).
• Accrued payroll spans month-ends.
• Revenue and expense recognition matter for investor reporting, audit, or covenants.
• Annual revenue passes a few million and the books need to support real decisions.

How to switch

1. 1Pick a clean cutover date — usually the start of a fiscal year.
2. 2Build opening balances: AR for revenue earned-but-not-collected, AP for expenses incurred-but-not-paid, deferred revenue for cash received in advance, prepaid expenses for cash spent in advance.
3. 3Run accrual-basis books going forward, with cash-basis as a memo for tax purposes if the company files cash-basis tax returns.
4. 4Restate the prior year if comparative reporting matters.

A clean switch takes 4–6 weeks of work for a sub-$10M company. Most of the time goes into building the opening balances. Once the opening balances are right, the monthly accrual cycle is normal close work.