During the unpredictable early stages of a business, accounting can help startups gain financial clarity. By carefully tracking income, expenses, assets, and liabilities, and keeping detailed and accurate financial records, startups can make smart decisions about growth and investments while showing potential investors that the startup is reliable and has strong growth potential. Good accounting also helps manage cash flow, and ensures that startups comply with financial regulations and tax laws – helping them avoid penalties and legal issues.

Cash flow problems are a major reason why nearly half of startups fail within the first five years, which highlights the importance of accurate accounting processes. Ultimately, accounting is a strategic tool that supports sustainability and growth, providing insights that steer startups towards success. Below, we'll explain accounting basics, how to start accounting for a new business, accounting software, and accounting costs.

What's in this article?

• How to start accounting for a new business
  
• Do startups need accountants?
  
• 5 accounting approaches for startups
  
• What to look for in a startup accounting service
  
• Accounting basics every startup should track
  
• Accounting software for startups
  
• How your accounting needs change by stage
  
• Startup-specific accounting topics for founders
  
• Preparing for investor due diligence
  
• How Stripe Revenue Recognition can help
  
• FAQs about accounting for startups
  

How to start accounting for a new business

Follow these steps to start your accounting processes for a new business.

• Separate business and personal finances: Open a separate bank account and credit card specifically for your business transactions. This makes it much easier to track income and expenses, and it simplifies tax preparation.

• Choose an accounting method: Choose between cash accounting, which records income when received and expenses when paid, and accrual accounting, which records income when earned and expenses when incurred. Cash accounting is simpler, but it does not provide as accurate a picture of a business's finances as accrual accounting.

• Set up a chart of accounts: Create a list of categories for your income and expenses such as "Sales", "Rent", or "Salaries". This helps organise your financial data and generate reports.

• Track income and expenses: Record every transaction, no matter how small. Use accounting software or a spreadsheet to stay organised. Make sure to categorise each transaction correctly in your chart of accounts.

• Reconcile bank statements: Regularly compare your bank statements to your accounting records to catch any errors and ensure everything matches up.

• Prepare financial statements: The following basic financial statements are an important part of accounting for any business.

• Income statement: This shows your income and expenses over a specific period, revealing your profit or loss.

• Balance sheet: This gives you a snapshot of your financial position by showing your assets, liabilities, and equity at a specific point in time.

• Cash flow statement: This shows the flow of cash in and out of your business, tracking your liquidity.

Do startups need accountants?

An accountant can offer startups major benefits. While some founders might handle basic accounting tasks at first, professional accountants bring a high level of expertise and efficiency, especially as the business grows. Here are some reasons why startups might find accountants helpful.

• Financial expertise: Accountants have specialised knowledge in financial management, tax laws, and regulatory requirements. They can provide insights and advice that go beyond basic bookkeeping.

• Time-saving: Running a startup demands a lot of time and energy. By outsourcing accounting tasks, founders can focus on core business activities such as product development, marketing, and customer engagement.

• Accuracy and compliance: Accountants ensure that financial records are accurate and comply with all relevant laws and regulations. This reduces the risk of errors that could lead to financial penalties or legal issues.

• Tax optimisation: Accountants are well-versed in tax laws and can identify opportunities for tax savings. They can also ensure that businesses meet all tax obligations promptly, avoiding penalties for late or incorrect filings.

• Financial planning and strategy: Accountants can assist with financial planning, budgeting, and forecasting. They help startups set realistic financial goals and develop strategies to achieve them.

• Investor relations: Accurate and professionally prepared financial statements help attract and retain investors. Accountants can prepare the necessary documents and reports to demonstrate a startup's financial health and growth potential.

• Internal controls and fraud prevention: Accountants can establish internal controls that protect the startup's assets and reduce the risk of fraud. This is particularly important as the business scales and financial transactions become more complex.

• Scalability: As a startup grows, its financial operations become more complex. Accountants can help manage this growth by setting up scalable accounting systems and processes that adapt to the changing needs of the business.

• Business valuation and exit strategy: For startups considering selling, merging, or going public, accountants provide valuable services in business valuation and preparing for due diligence processes.

5 accounting approaches for startups

Startups can choose from several accounting approaches, each with different cost, expertise, and scalability tradeoffs.

1. DIY founder-managed accounting

Founders handle their own books using spreadsheets or entry-level software. This is typically the most cost-effective option for small businesses with simple finances, although it requires investing time in learning accounting basics through free online courses or resources. Software costs range from free basic plans to a few hundred dollars per month.

2. Part-time bookkeeper

A part-time or freelance bookkeeper handles day-to-day transaction recording and reconciliation without the cost of a full-time hire. Bookkeeping services typically run from around US$100 to US$500 per month depending on transaction volume and complexity, making this a middle-ground option as a startup outgrows DIY methods.

3. Outsourced accounting firm (startup-specialist)

Firms that specialise in startups offer bundled services such as financial statement preparation, tax filings, and advisory support. Costs range from US$500 to several thousand dollars per month depending on service level, and some firms also offer virtual CFO services (US$1,000–US$5,000 per month) for strategic financial guidance. This option brings professional expertise without the overhead of an in-house hire.

4. AI accounting software

AI-powered platforms automate categorisation, reconciliation, invoicing, and reporting, reducing manual bookkeeping work and human error. These tools can lower ongoing labour costs significantly, though pricing varies by feature set, and startups should still budget for occasional professional review of AI-generated reports, especially around tax time.

5. Hybrid (software + fractional CFO)

This approach pairs accounting software for day-to-day transaction management with a fractional or part-time CFO for high-level strategy, forecasting, and investor-ready reporting. It combines the cost efficiency of automation with expert financial guidance, making it a popular choice for growth-stage startups that aren't ready for a full-time finance hire.

Whichever approach you choose, it's worth negotiating rates with any accountants or bookkeepers you work with, and keeping additional costs such as tax preparation, audits, and one-off consulting fees in mind as your startup scales.

What to look for in a startup accounting service

If you decide to work with an outsourced accounting service, keep these factors in mind when evaluating providers.

• Startup experience: Look for a firm that specifically works with startups, not just small businesses in general. Startup-specific challenges, such as burn rate tracking, investor reporting, and R&D tax credits, require specialised knowledge.

• Service scope: Confirm exactly what's included, whether that's basic bookkeeping, tax filings, financial statement preparation, or higher-level advisory and CFO services. Make sure the scope matches your current needs and can expand as you grow.

• Pricing transparency: Choose a provider with clear, predictable pricing rather than vague hourly rates. Understand what triggers additional fees, such as a rising transaction volume or added services.

• Software compatibility: Check that the service works with the accounting software and tools you already use, or that they can help you transition to a platform that fits your needs.

• Responsiveness and communication: Startups move fast, so look for a provider who's easy to reach and responsive, especially around deadlines like tax season or fundraising due diligence.

• Scalability: Choose a provider that can grow with you, from basic bookkeeping in the early days to more complex financial planning and reporting as your startup scales.

• References and reputation: Ask for references from other startups they work with, and look for reviews or case studies that speak to their reliability and expertise.

Accounting basics every startup should track

Every startup should track these accounting basics:

• Bank and credit card statements: Reconcile these statements regularly to catch any errors or discrepancies.

• Income and expenses: Track all the money coming in (e.g., sales, investments) and all the money going out (e.g., rent, salaries, supplies).

• Invoices and receipts: Keep a record of all the invoices you send out and all the receipts you receive.

• Payroll records: If you have employees, keep track of their wages, taxes, and any other benefits you provide.

• Assets and liabilities: Keep a list of everything your startup owns (assets) and everything it owes (liabilities). This will give you a snapshot of your overall financial position.

Key metrics every startup should track

Beyond basic bookkeeping, startups should monitor these financial metrics to gauge health and guide decision-making:

Burn rate: How much cash your startup spends each month. Tracking this helps you understand how long your current funding will last.

Runway: The number of months your startup can operate before running out of cash, based on your current burn rate and cash reserves.

Gross margin: The percentage of revenue left after subtracting the cost of goods or services sold. This shows how efficiently you're generating revenue.

Monthly recurring revenue (MRR): For subscription-based startups, this tracks predictable monthly revenue and is a key indicator of growth.

Customer acquisition cost (CAC): The average cost of acquiring a new customer, including marketing and sales expenses. Comparing this to customer lifetime value helps assess profitability.

Accounts receivable and payable: Money owed to you and money you owe others. Monitoring these keeps cash flow predictable and highlights potential collection issues.

Accounting software for startups

Accounting software can be a great way for a startup to improve its accounting. This software automates tasks such as invoicing, expense tracking, and financial reporting, which frees up valuable time for other priorities. It reduces the risk of human error in calculations and data entry and keeps financial data organised and accessible in one place. It also generates reports and dashboards that can help you understand your financial performance and make informed decisions.

Here are some popular accounting software options for startups.

• QuickBooks Online: QuickBooks is user-friendly, comprehensive, and integrates with many other business systems. It's an effective solution for most startups.

• Xero: Xero is known for its clean interface and comprehensive features. It's a good option for startups that want a more modern and intuitive experience.

• Zoho Books: Zoho Books is a budget-friendly option that still offers key accounting features. It's a good choice for early-stage startups with limited resources.

• FreshBooks: FreshBooks is geared towards freelancers and small businesses. Its strengths are invoicing and expense tracking.

• Wave: Wave is a free option with basic accounting features. It's a good starting point for very early-stage startups with minimal transactions.

Consider the following factors to determine which software is the best fit for your startup.

• Business needs: What features do you need? For example, do you need invoicing, expense tracking, inventory management, or project accounting? Make a list of your must-haves and nice-to-haves.

• Budget: Accounting software prices vary widely. Determine how much you're willing to spend and look for options within your budget.

• Ease of use: Choose software that is easy for you and your team to use. A user-friendly interface will save you time and frustration.

• Integrations: Does the software integrate with other systems you use such as your bank, payment processor, or customer relationship management (CRM)?

• Scalability: Will the software grow with your business? Choose a solution that can handle your needs as your business expands.

• Customer support: Look for software with responsive customer support in case you encounter any issues.

How your accounting needs can change by stage

Accounting requirements grow with your company. Here's what typically matters at each stage:

When to upgrade your accounting function

Growth tends to force an accounting upgrade. International expansion, multicurrency transactions, and more complex revenue arrangements all outpace what a generalist bookkeeper or basic software subscription can handle.

The next layer up is usually a fractional CFO, brought on somewhere around Series A, who takes ownership of fundraising prep, board-level reporting, and financial modelling – work that goes well beyond keeping the books current. As the business keeps growing, this often evolves into an in-house team, starting with a controller or senior accountant and adding analysts as needed. This shift tends to land around Series B or once revenue crosses roughly US$10–US$20 million, although transaction complexity is a better trigger than any specific number.

Startup-specific accounting topics for founders

Startups face accounting challenges that many other types of small businesses never encounter. Here's a quick primer on the key terms for founders to understand.

R&D tax credits (Section 41)

A federal tax credit that offsets costs tied to product development, engineering, and prototyping. It's one of the most valuable tax benefits startups miss – even pre-revenue companies with no income tax liability can apply the credit against payroll taxes, making it real cash back rather than just a deduction.

ASC 606 revenue recognition for SaaS

ASC 606 (short for Accounting Standards Codification 606) is the accounting standard that governs when and how you recognise revenue, particularly for subscription and multiyear contracts. Instead of recognising revenue when cash arrives, ASC 606 requires recognising it as you deliver the service – a critical distinction for SaaS companies with deferred or recurring revenue.

409A valuations – the annual requirement for stock-option-issuing startups

An independent appraisal of your company's fair market value, required annually (or after major financing events) for any startup issuing stock options. It sets the strike price for employee options and keeps you compliant with IRS rules.

SAFE and convertible note accounting

SAFEs (Simple Agreements for Future Equity) and convertible notes are common early-stage fundraising instruments that convert to equity at a later date, usually during a priced round. Each requires specific accounting treatment on your balance sheet, since they're neither pure debt nor equity until conversion.

Stock-based compensation (ASC 718)

The accounting standard for expensing equity grants – stock options, restricted stock units (RSUs), and similar awards – given to employees. It requires recording the cost of that equity on your financial statements, even though no cash changes hands.

QSBS (Section 1202) – the US$10M capital gains exclusion most founders don't optimise for

A tax provision allowing founders and early investors to exclude up to US$10 million (or more, in some cases) in capital gains from federal tax when they sell qualifying startup stock held for more than five years. It's one of the most underused tax benefits available to startup equity holders.

Delaware franchise tax

An annual tax owed by Delaware-incorporated companies, calculated using one of two methods that can produce wildly different bills. Many startups overpay simply by not choosing the more favourable calculation method.

Cap table maintenance

Keeping an accurate, up-to-date record of who owns what percentage of your company – including equity, options, SAFEs, and convertible notes. A clean cap table is essential for fundraising, option grants, and avoiding costly reconciliation issues at exit or acquisition.

Preparing for investor due diligence

The founders who breeze through diligence are those whose numbers are consistent and explainable.

What you should have on hand before anyone asks

• Historical financials – three years' worth, or your full operating history if you're younger than that
  
• A current cap table showing every option grant, exercise, and outstanding security
  
• Revenue segmented by customer and by cohort, not just a top-line number
  
• A live burn rate calculation with runway maths attached
  
• Every tax return you've filed since incorporating
  
• Signed copies of contracts and commitments that materially affect the business
  
• Ageing schedules for what customers owe you and what you owe vendors
  
• A full year of bank statements
  

The jump from organised books to audit-ready books

Being organised isn't the same as being audit-ready. That's a specific bar, and clearing it usually involves:

• Switching from cash to accrual accounting, if that transition hasn't happened yet
  
• Putting your accounting policies in writing instead of relying on institutional memory
  
• Building basic controls, such as requiring sign-off on spending and keeping the person who approves a transaction separate from the person who initiates it
  
• Closing the books on a fixed monthly cadence, following the same documented steps each time
  
• Keeping equity paperwork tight – every 409A, every grant, every exercise, on file and current
  
• Tying every account back to source documentation every month, not just eyeballing the totals
  

How Stripe Revenue Recognition can help

Revenue Recognition helps to streamline accrual accounting – including audits, end-of-month close, reporting, and more – so you can close your books with greater efficiency and accuracy. It automates and configures revenue reports to help support compliance with ASC 606 and IFRS 15.

Revenue Recognition can help you:

• Gain a more complete view of your revenue: In the Stripe Dashboard, see all your Stripe transactions and terms, and import non-Stripe data.

• Automate revenue reports: Generate accounting reports that are ready to use – without engineering resources.

• Customise for your business: Create and automate custom rules to recognise revenue, in line with your business's accounting practices.

• Audit in real time: Prepare for audits by tracing any revenue amount down to the underlying customers and transactions.

Learn more about how Revenue Recognition can help you comply with global accounting principles, or get started today.

FAQs about accounting for startups