Accounting

How a company records what happens to it and turns those records into financial statements: the accounting equation, double-entry bookkeeping, accrual accounting and its principles, depreciation, inventory, what to capitalize, leases and stock compensation, US GAAP vs IFRS, and how a founder should run the books. One invented company, Acme Analytics, Inc., runs through this sheet and financial statements, and its numbers tie out. What to do with the numbers is in corporate finance, valuation and startup finance; household money is under personal finance.

What accounting is for

Accounting is a measurement system: it turns thousands of transactions into a few numbers people can make decisions with. Three branches measure the same events for different audiences and under different rules.

• Book income and taxable income legitimately differ (depreciation methods, deferred revenue, stock compensation, R&D). Two sets of numbers is normal; two sets of books hiding facts is fraud.
• GAAP is not the truth; it is a convention designed to be comparable and hard to manipulate. Managerial numbers can be better for decisions but are unaudited and easy to flatter yourself with.
• For a startup, GAAP books matter the moment you raise a priced round, borrow from a bank, or get acquired: diligence will restate anything else.

The accounting equation

It always balances because it is an identity, not a hypothesis. Every asset was financed by someone: either a creditor (liability) or an owner (equity). Equity is defined as whatever is left over. Expanded, with profit flowing into equity:

Every transaction changes at least two things so that the identity still holds:

Debits and credits

Double-entry bookkeeping (described in print by Luca Pacioli in 1494) records every transaction as at least one debit (Dr, left side) and one credit (Cr, right side) of equal total. "Debit" and "credit" mean left and right, not good and bad. Total debits always equal total credits, which is the equation above in bookkeeping form.

Why expenses are debits: an expense reduces equity, and equity decreases with a debit. Why your bank "credits" your account when you deposit money: from the bank's books, your deposit is a liability it owes you.

A T-account is a scratch ledger for one account: debits on the left, credits on the right. Two of Acme's FY2026 accounts, using the year's totals:

        Accounts receivable (asset)            Deferred revenue (liability)
   Dr                       Cr              Dr                       Cr
  ---------------------------------       ---------------------------------
  Open      250,000 | Collected 3,188,000   Recognized 3,000,000 | Open       400,000
  Billed  3,326,000 | Written off   8,000   Refunded       6,000 | Billed   3,126,000
  ---------------------------------       ---------------------------------
  Close     380,000 |                                            | Close      520,000

Check: 250,000 + 3,326,000 − 3,188,000 − 8,000 = 380,000; 400,000 + 3,126,000 − 3,000,000 − 6,000 = 520,000.

The running example: Acme Analytics

Acme Analytics, Inc. is invented: a Delaware C corporation selling a B2B analytics SaaS product (monthly and annual plans) plus a small line of plug-in data gateways (hardware, held as inventory). Calendar fiscal year, accrual basis, US GAAP. Simplifying assumptions: a flat 25% combined federal and state income-tax rate on pre-tax income, taxable income equal to book income (no deferred taxes), employer payroll taxes reported inside each salaries line, and one office on a month-to-month lease.

Opening balance sheet, 31 December 2025:

ACME ANALYTICS, INC. -- BALANCE SHEET, 31 DEC 2025 (US$)
Cash                                  600,000
Accounts receivable        250,000
  less allowance           (10,000)   240,000
Inventory                              20,000
Prepaid expenses                       24,000
Property and equipment      60,000
  less accum. depreciation (20,000)    40,000
TOTAL ASSETS                          924,000
 
Accounts payable                       30,000
Accrued expenses                       40,000
Deferred revenue                      400,000
Income tax payable                     20,000
TOTAL LIABILITIES                     490,000
Paid-in capital (9,000,000 shares)    100,000
Retained earnings                     334,000
TOTAL EQUITY                          434,000
TOTAL LIABILITIES AND EQUITY          924,000

Journal entries for common transactions

A journal entry records one transaction: date, accounts, debit and credit amounts, and a memo. Debits are listed first; credits are indented. These are real entries from Acme's FY2026 books; each is one piece of the annual totals that appear in the statements.

1. RAISE EQUITY -- 2 Jan: sell 1,000,000 common shares at $0.50 (par $0.0001)
   Dr Cash                                      500,000
      Cr Common stock (1,000,000 x $0.0001)                 100
      Cr Additional paid-in capital                     499,900
 
2. BUY EQUIPMENT -- 5 Jan: laptop for a new engineer, paid by card
   Dr Property and equipment (computers)          2,400
      Cr Cash                                             2,400
 
3. PREPAY SOFTWARE -- 5 Jan: annual dev-tool license paid upfront
   Dr Prepaid expenses                           12,000
      Cr Cash                                            12,000
   31 Jan (and every month-end): use up one month
   Dr R&D expense -- software tools               1,000
      Cr Prepaid expenses                                 1,000
 
4. MONTHLY SUBSCRIPTION -- 1 Jan: bill a monthly customer
   Dr Accounts receivable                         5,000
      Cr Deferred revenue                                 5,000
   31 Jan: service delivered for the month
   Dr Deferred revenue                            5,000
      Cr Subscription revenue                             5,000
 
5. COLLECT CASH -- 15 Feb: the customer pays the invoice
   Dr Cash                                        5,000
      Cr Accounts receivable                              5,000
 
6. BUY INVENTORY -- 3 Mar: 50 gateways at $300, 30-day terms
   Dr Inventory                                  15,000
      Cr Accounts payable                                15,000
 
7. SELL INVENTORY -- 20 Mar: 10 gateways at $500 (perpetual system)
   Dr Accounts receivable                         5,000
      Cr Hardware revenue                                 5,000
   Dr Cost of revenue -- hardware                 3,000
      Cr Inventory                                        3,000
 
8. PAYROLL -- 15 Apr: semi-monthly run
   Dr Salaries (by department)                   75,000
      Cr Cash (net pay)                                  56,000
      Cr Payroll liabilities (withholding,               19,000
         employee + employer FICA, state)
   Remit withholding to IRS/state a few days later
   Dr Payroll liabilities                        19,000
      Cr Cash                                            19,000
 
9. LOAN -- 1 Jul: $300,000 term loan, 8%, interest-only, due 30 Jun 2029
   Dr Cash                                      300,000
      Cr Long-term debt                                 300,000
 
10. INTEREST -- 1 Aug to 1 Dec: pay prior month's interest (x5)
   Dr Interest expense ($300,000 x 8% / 12)       2,000
      Cr Cash                                             2,000
   31 Dec: December's interest is owed but unpaid (accrual)
   Dr Interest expense                            2,000
      Cr Accrued expenses -- interest                     2,000
 
11. ANNUAL PLAN BILLED UPFRONT -- 1 Oct: $120,000 for 12 months
   Dr Accounts receivable                       120,000
      Cr Deferred revenue                               120,000
   20 Oct: customer pays
   Dr Cash                                      120,000
      Cr Accounts receivable                            120,000
   31 Oct, 30 Nov, 31 Dec: one month earned each time
   Dr Deferred revenue                           10,000
      Cr Subscription revenue                            10,000
 
12. REFUND -- 12 Nov: annual customer cancels with 3 months left;
    contract gives a pro-rata refund of the unearned $6,000
   Dr Deferred revenue                            6,000
      Cr Cash                                             6,000
 
13. BAD DEBT -- 30 Sep: a customer goes bankrupt owing $8,000
   Dr Allowance for doubtful accounts             8,000
      Cr Accounts receivable                              8,000
   31 Dec: aging review says the allowance should be $17,000;
   it stands at $2,000 (10,000 - 8,000), so top it up
   Dr Bad debt expense (G&A)                     15,000
      Cr Allowance for doubtful accounts                 15,000
 
14. ACCRUED WAGES -- 31 Dec: wages for 22-31 Dec, paid 8 Jan 2027
   Dr Salaries (by department)                   58,000
      Cr Accrued expenses -- wages                       58,000
 
15. DEPRECIATION -- 31 Dec: all computers, straight-line, 3 years
   Dr Depreciation expense (G&A)                 25,000
      Cr Accumulated depreciation                        25,000
   (the laptop in entry 2 contributes 2,400 / 3 = 800 a year)
 
16. CAPITALIZED SOFTWARE -- engineering pay spent building a new
    connectors module (internal-use software, ASC 350-40);
    placed in service 1 Jul, 3-year life
   Dr Capitalized software                      120,000
      Cr R&D expense -- salaries                        120,000
   31 Dec: six months' amortization (120,000 / 36 x 6)
   Dr Cost of revenue -- amortization            20,000
      Cr Accumulated amortization                        20,000
 
17. STOCK-BASED COMPENSATION -- vesting of employee options
   Dr R&D / S&M / G&A expense (20k/10k/10k)      40,000
      Cr Additional paid-in capital                      40,000
 
18. INCOME TAX -- 31 Dec: 25% x 560,000 pre-tax income
   Dr Income tax expense                        140,000
      Cr Income tax payable                             140,000
 
19. CLOSING ENTRY -- 31 Dec: zero the temporary accounts
   Dr Revenue accounts (3,200,000 + 22,000)   3,222,000
      Cr Expense accounts (incl. tax)                 2,802,000
      Cr Retained earnings (net income)                 420,000

Patterns worth memorizing:

• Cash moving is not the same as revenue or expense. Entries 2, 3, 5, 9, 11 and 12 move cash without touching profit; entries 3 (month-end), 13–17 change profit without moving cash.
• Prepaid (entry 3) is an asset you used cash to buy; deferred revenue (entry 11) is a liability you took cash to owe. They are mirror images.
• Refunds of unearned amounts reduce deferred revenue, not revenue (entry 12). A refund of revenue already recognized would debit a contra-revenue account (refunds and credits).
• Allowance method for bad debts (entry 13): estimate the loss when you can, write off specific accounts against the allowance later. The direct write-off method (expense only when a customer defaults) is not GAAP when losses are material, because it books the loss in the wrong period.
• Estimates of expected credit losses fall under ASC 326 (the "CECL" model), which applies to trade receivables too.

Trial balance

After adjusting entries (before closing), the ledger's debits and credits must total the same:

ACME -- ADJUSTED TRIAL BALANCE, 31 DEC 2026 (US$)
Account                                   Debit        Credit
Cash                                  1,776,000
Accounts receivable                     380,000
Allowance for doubtful accounts                        17,000
Inventory                                35,000
Prepaid expenses                         30,000
Property and equipment                   90,000
Accumulated depreciation                               45,000
Capitalized software                    120,000
Accumulated amortization                               20,000
Accounts payable                                       45,000
Accrued expenses                                       60,000
Deferred revenue                                      520,000
Income tax payable                                     30,000
Long-term debt                                        300,000
Paid-in capital                                       640,000
Retained earnings (opening)                           334,000
Subscription revenue                                3,000,000
Hardware revenue                                      200,000
Interest income                                        22,000
Cost of revenue (4 accounts)            700,000
R&D (salaries, tools, SBC)              850,000
Sales and marketing                     600,000
General and administrative              500,000
Interest expense                         12,000
Income tax expense                      140,000
TOTALS                                5,233,000     5,233,000

A balanced trial balance proves only that debits equal credits. It does not catch an entry posted to the wrong account, an entry omitted entirely, or the same error on both sides. Reconciliations catch those.

Chart of accounts

The chart of accounts is the list of every account in the general ledger, numbered by type so reports sort themselves. Keep it short; add accounts when a decision needs the split, not before.

CHART OF ACCOUNTS TEMPLATE (SaaS, US GAAP)
1000-1999  ASSETS
  1000 Operating bank account        1010 Payroll bank account
  1050 Money market / T-bill sweep   1100 Accounts receivable
  1110 Allowance for doubtful accts  1200 Inventory
  1300 Prepaid expenses              1310 Deposits
  1500 Computers and equipment       1510 Accum. depreciation
  1600 Capitalized software          1610 Accum. amortization
  1700 Right-of-use assets (leases)
2000-2999  LIABILITIES
  2000 Accounts payable              2100 Credit cards
  2200 Accrued expenses              2210 Accrued wages / bonus
  2220 Payroll liabilities           2300 Sales tax payable
  2400 Deferred revenue              2500 Income tax payable
  2600 Lease liabilities             2700 Long-term debt
  2800 SAFEs / convertible notes (see startup finance)
3000-3999  EQUITY
  3000 Common stock (par)            3100 Preferred stock
  3200 Additional paid-in capital    3900 Retained earnings
4000-4999  REVENUE
  4000 Subscription revenue          4100 Services revenue
  4200 Hardware revenue              4900 Refunds and credits (contra)
5000-5999  COST OF REVENUE
  5000 Hosting                       5100 Support salaries
  5200 Hardware COGS                 5300 Payment processing fees
  5400 Amortization of capitalized software
6000-6999  OPERATING EXPENSES (tag by department: R&D, S&M, G&A)
  6000 Salaries and wages            6010 Payroll taxes
  6020 Benefits                      6030 Stock-based compensation
  6100 Contractors                   6200 Software subscriptions
  6300 Advertising                   6400 Travel
  6500 Rent                          6600 Professional fees
  6700 Insurance                     6800 Depreciation
  6850 Bad debt expense              6900 Other
7000-7999  OTHER INCOME AND EXPENSE
  7000 Interest income               7100 Interest expense
  7200 FX gains/losses               7300 Gain/loss on disposal
8000  INCOME TAX EXPENSE

Use classes or departments (R&D, S&M, G&A, cost of revenue) as a tag rather than duplicating every expense account four times. Investors read SaaS income statements by function, so tag from day one.

Cash vs accrual basis

Acme's $120,000 annual contract (entry 11) shows why accrual matters. Cash basis books $120,000 of revenue in October and nothing for the next nine months, making Q4 look spectacular and Q1–Q3 2027 look like a collapse. Accrual basis books $10,000 a month, which is what actually happened.

Who may use the cash method for tax

Book basis and tax basis can differ; many small companies keep GAAP books and file taxes on the cash method. The IRS limits who may:

Acme's gross receipts (≈$3.2 million) are far under the threshold, so it could file on the cash method while keeping accrual GAAP books. Changing method needs IRS consent (Form 3115). Ask a CPA.

The accounting cycle

1. Capture source documents

   Invoices, receipts, bills, bank and card feeds, payroll reports, contracts. No document, no entry.

2. Journalise

   Record each transaction as a balanced journal entry (most software does this from bank feeds and invoices).

3. Post to the general ledger

   Each account accumulates its entries; the ledger is the book of accounts.

4. Unadjusted trial balance

   List every account balance; debits must equal credits.

5. Adjusting entries

   Accruals (wages, interest, unbilled revenue), deferrals (prepaids used, deferred revenue earned), depreciation and amortization, reserves (bad debt, inventory), stock compensation, tax.

6. Reconcile

   Bank, card, AR, AP, payroll and every balance-sheet account to an external source or a supporting schedule.

7. Adjusted trial balance and statements

   Produce the income statement, balance sheet, cash flow statement and statement of equity.

8. Close

   Closing entries move revenue and expense balances into retained earnings; lock the period so nobody posts into it.

Monthly for a funded startup (a 5–10 business-day close is a reasonable target), annually at minimum for anyone. The full checklist is in templates and checklists.

Key principles

Revenue recognition (ASC 606)

ASC 606 (and its near-twin IFRS 15), Revenue from Contracts with Customers, replaced industry-specific rules for public companies from 2018. Its core principle: recognize revenue to depict the transfer of promised goods or services in an amount reflecting the consideration expected in exchange. Five steps:

Worked example: a customer buys one gateway plus a 12-month subscription for $11,000 as a bundle. Acme sells the gateway alone for $500 and the subscription alone for $12,000 (total SSP $12,500).

Acme books $440 of hardware revenue on delivery and $880 a month of subscription revenue. The discount is spread across both obligations, not dumped on one.

Related terms: contract asset (revenue earned before the right to bill is unconditional), unbilled receivable, contract liability (deferred revenue), remaining performance obligations (RPO: contracted revenue not yet recognized, including unbilled future years; public SaaS companies disclose it). Sales commissions on multi-year contracts are usually capitalized as costs to obtain a contract (ASC 340-40) and amortized, with a practical expedient to expense them when the amortization period would be one year or less.

How the three statements connect

Acme FY2026 in one line each: net income $420,000 lifts retained earnings from $334,000 to $754,000; operating ($526,000), investing (−$150,000) and financing ($800,000) cash flows sum to $1,176,000, which is exactly cash of $1,776,000 minus $600,000. The full statements are in financial statements.

Depreciation

Depreciation spreads the cost of a tangible long-lived asset (property, plant and equipment, "PP&E") over its useful life. It is cost allocation, not valuation: book value after depreciation is not what the asset would sell for. Land is not depreciated.

Worked example: equipment costing $C$ = $10,000 with salvage value $S$ = $1,000 and useful life $n = 5$ years (depreciable base $9,000).

YEAR      STRAIGHT-LINE        DOUBLE-DECLINING (rate 40%)
          dep    book value    dep     book value
0                  10,000                10,000
1        1,800      8,200     4,000       6,000
2        1,800      6,400     2,400       3,600
3        1,800      4,600     1,440       2,160
4        1,800      2,800       864       1,296
5        1,800      1,000       296       1,000   <- capped at salvage
total    9,000                9,000

• Both methods expense the same $9,000 in total; only the timing differs. Accelerated methods lower early profit and raise later profit.
• Salvage value is ignored in the DDB rate but still acts as a floor. Many companies switch from DDB to straight-line when straight-line on the remaining base gives a larger charge.
• Tax depreciation is separate. US tax uses MACRS (computers are 5-year property), plus bonus depreciation (100% for qualifying property acquired after 19 January 2025, made permanent by the 2025 One Big Beautiful Bill Act) and §179 expensing (up to $2,560,000 for tax years beginning in 2026, phased out above $4,090,000 of purchases). The book–tax gap creates deferred tax liabilities.
• Impairment: if an asset's carrying amount is not recoverable (US GAAP) or exceeds its recoverable amount (IFRS), write it down. US GAAP forbids reversing impairment losses on assets held and used; IFRS allows reversals (except for goodwill).
• Disposal: remove cost and accumulated depreciation; the difference from sale proceeds is a gain or loss.

Amortization and intangibles

Amortization is depreciation for intangible assets: software, patents, customer lists, trademarks, licenses.

Acme's capitalized connectors module (entry 16): $120,000 over 36 months = $3,333 a month, starting when placed in service. SaaS companies usually present this amortization within cost of revenue, since the software delivers the service.

Inventory costing

Inventory is carried at cost and expensed as cost of goods sold (COGS) when sold. When identical units were bought at different prices, a cost-flow assumption decides which costs go to COGS and which stay on the balance sheet.

Illustrative quarter for Acme's gateways: 40 units on hand at $250, bought 100 at $300 then 60 at $320, sold 150 at $500 (periodic system). Goods available: 200 units costing $59,200.

• With rising prices: LIFO gives the highest COGS, lowest profit, lowest tax (here $3,000 more COGS than FIFO, about $750 less tax at 25%) and the most outdated balance sheet. With falling prices, the reverse.
• LIFO conformity rule: a US company that uses LIFO for its tax return must also use it in its financial statements (IRC §472(c)). A LIFO company discloses a LIFO reserve (FIFO cost minus LIFO cost); add it back to compare with FIFO/IFRS companies.
• Write-downs: under US GAAP, inventory measured with FIFO or average cost is carried at the lower of cost and net realizable value (ASU 2015-11); LIFO and retail-method inventory still use lower of cost or market. IFRS uses lower of cost and NRV for all and allows reversals of write-downs; US GAAP does not.
• Perpetual systems update inventory with every sale (entry 7); periodic systems count at period end and back into COGS as beginning + purchases − ending. LIFO and average give different answers under perpetual vs periodic; FIFO gives the same.

Capitalize or expense

Capitalize = record the cost as an asset and expense it gradually (depreciation/amortization). Expense = hit the income statement now. Capitalize when the spend creates a future benefit beyond the current period and meets the specific rules; otherwise expense.

Internal-use software: current rules and ASU 2025-06

Current ASC 350-40 uses three project stages: preliminary project (expense), application development (capitalize payroll and direct costs of coding, configuration, testing), and post-implementation/operation (expense, including training and maintenance). Upgrades that add functionality are capitalized.

In September 2025 the FASB issued ASU 2025-06, Targeted Improvements to the Accounting for Internal-Use Software. It removes the project-stage model. Capitalization starts when both (1) management has authorized and committed to funding the project and (2) it is probable the project will be completed and the software used as intended, which requires that any significant development uncertainty (novel, unproven functions or unresolved performance requirements) has been resolved. It is effective for annual periods beginning after 15 December 2027 (early adoption permitted). The aim is to fit agile development, where "stages" never existed. Expect somewhat less capitalization at startups doing genuinely novel work.

IFRS (IAS 38) splits projects into research (expense) and development (capitalize once six criteria are shown: technical feasibility, intention to complete, ability to use or sell, probable future benefits, adequate resources, and reliable measurement). IFRS therefore capitalizes more development spend than US GAAP.

Tax is different again

For tax years beginning after 31 December 2024, new IRC §174A (One Big Beautiful Bill Act, July 2025) again lets companies deduct domestic research and experimental expenditure, including software development, immediately; foreign research must still be amortized over 15 years under §174. Small businesses meeting the $31 million gross-receipts test could also elect to apply the change retroactively to 2022–2024. This reversed the 2022–2024 rule that forced 5-year amortization of domestic R&D and hit software startups with surprise tax bills.

Accruals, deferrals and reserves

Adjusting entries exist to move revenue and expense into the right period. Four types plus reserves:

Common reserves and estimates: doubtful accounts, inventory obsolescence, warranty provisions, sales returns and credits, accrued bonuses, accrued vacation (where it vests), legal contingencies (ASC 450: accrue if a loss is probable and reasonably estimable; disclose if reasonably possible), and income tax. Reserves are where earnings get managed: "cookie-jar" reserves over-accrued in good years and released in bad ones are a classic abuse.

Leases (ASC 842)

Since ASC 842 (effective 2019 for public companies, 2022 for private), lessees put almost every lease on the balance sheet: a right-of-use (ROU) asset and a lease liability equal to the present value of lease payments.

• Short-term leases (12 months or less, no purchase option reasonably certain) can stay off the balance sheet by policy election. Acme's month-to-month office is one: rent is simply expensed ($60,000 in FY2026).
• IFRS 16 has a single lessee model: every on-balance-sheet lease is accounted for like a finance lease, so IFRS companies report higher EBITDA than otherwise identical US GAAP companies with operating leases. IFRS also exempts low-value assets (the IASB had in mind items such as laptops and phones); US GAAP has no low-value exemption.

Stock-based compensation (ASC 718)

Options, RSUs and restricted stock given to employees are an expense, measured at grant-date fair value and recognized over the requisite service period (usually the vesting period).

SBC is a real cost: it is paid in dilution instead of cash. Many companies exclude it from "adjusted" metrics; a reader should put it back (see financial statements). Mechanics of option pools and 409A are in startup finance.

US GAAP vs IFRS

IFRS is required or permitted for listed companies in most of the world outside the US; the SEC accepts IFRS (as issued by the IASB) from foreign private issuers without reconciliation, but US domestic registrants must use US GAAP.

Audits, reviews and compilations

• Public companies need a PCAOB audit and (for accelerated filers) an auditor's attestation on internal control over financial reporting under SOX §404(b). An IPO registration statement needs audited statements; emerging growth companies may present two years instead of three.
• A first audit is painful if the books were not kept on GAAP accrual: revenue recognition, capitalized software, stock comp and deferred revenue are the usual restatements. Keep books audit-ready from the first priced round.
• A qualified opinion, an adverse opinion, a disclaimer, or a going-concern paragraph in an audit report are red flags a reader must not skip.

Who does the books

• Bookkeeper: records and reconciles. CPA / accounting firm: tax returns, technical accounting, reviews and audits (an auditor cannot also keep your books). Controller: owns the close and controls. CFO: capital, planning, investors.
• Choose tools by fit: native bank feeds, your payroll provider's integration, multi-currency if needed, department/class tracking, a revenue-recognition module or schedule for annual plans, and an export your future auditor can use. No tool fixes bad habits.
• Keep records at least as long as the IRS can look back: generally 3 years after filing, 6 if income was under-reported by more than 25%, 7 for bad-debt or worthless-securities deductions, at least 4 for employment-tax records, and property records until 3+ years after you dispose of the asset. Many companies simply keep everything 7 years.

Common mistakes

Templates and checklists

MONTH-END CLOSE CHECKLIST                     Period: ________
DAY 1-2  CUT-OFF AND CAPTURE
[ ] All bank, card and payment-processor feeds imported
[ ] Customer invoices issued for the month; credit notes posted
[ ] Vendor bills entered (chase missing ones); receipts attached
[ ] Payroll journals posted (salaries, taxes, benefits)
DAY 2-4  RECONCILE
[ ] Every bank and card account reconciled to statements
[ ] Payment processor payouts matched to invoices, fees booked
[ ] AR aging ties to ledger; follow up > 30 days past due
[ ] AP aging ties to ledger
[ ] Payroll liabilities tie to payroll provider reports
DAY 3-6  ADJUST
[ ] Revenue: deferred revenue roll-forward (open + billed
    - recognized - refunded = close); ties to billing system
[ ] Accrued expenses: wages, bonus, interest, unbilled vendors
[ ] Prepaids amortized per schedule
[ ] Depreciation and amortization per fixed-asset register
[ ] Capitalized software: hours/costs for qualifying projects
[ ] Allowance for doubtful accounts reviewed vs aging
[ ] Inventory count or roll-forward; obsolescence reserve
[ ] Stock-based compensation per equity-plan report
[ ] Lease entries (if any on balance sheet)
[ ] Income tax provision / estimated payments
DAY 5-8  REVIEW AND REPORT
[ ] Balance sheet: every account has a supporting schedule
[ ] Flux analysis: explain any line moving > 10% or > $X
[ ] Cash flow statement ties to change in cash
[ ] KPIs updated: revenue, gross margin, burn, runway, ARR
[ ] Controller/founder review and sign-off
[ ] Lock the period in the accounting system

JOURNAL ENTRY TEMPLATE
Entry #: ____  Date: ________  Period: ______  Prepared by: ___
Memo (what and why): ___________________________________________
Support attached (invoice/contract/schedule): _________________
Account (number and name)          Dept/class      Dr        Cr
______________________________     ________   ________  ________
______________________________     ________   ________  ________
TOTALS (must be equal)                        ________  ________
Recurring? [ ] monthly [ ] reversing on ______  Approved by: ___

CAPITALIZATION POLICY (one page)
1. Threshold: items >= $2,500 per unit (or invoice) with a
   useful life > 1 year are capitalized; below it, expensed.
2. Useful lives: computers 3 yrs; furniture 5 yrs; leasehold
   improvements shorter of lease term or life; capitalized
   software 3 yrs. Straight-line, no salvage unless material.
3. Internal-use software (ASC 350-40): capitalize payroll and
   direct costs from the date criteria are met (document it);
   stop when substantially complete and ready for use.
   Maintenance, bug fixes, training, data conversion: expense.
4. Review for impairment when a project is abandoned or an
   asset is idle.
5. Fixed-asset register kept with tag, cost, date, life, owner.
6. Approved by: ________  Effective: ________

ANNUAL / YEAR-END CHECKLIST
[ ] 1099-NEC forms to contractors paid >= threshold (IRS rules)
[ ] W-2s via payroll provider
[ ] Delaware franchise tax and annual report (due 1 March)
[ ] Federal and state income-tax returns or extensions
[ ] Sales-tax filings by state; nexus review
[ ] Fixed-asset register physically verified
[ ] Inventory physical count
[ ] 409A valuation current (usually annual or after a round)
[ ] Cap table reconciled to equity accounts
[ ] Review or audit scheduled if lenders/investors require it
[ ] Books closed and locked for the year

References

• FASB Accounting Standards Codification (opens in a new tab): the authoritative source of US GAAP (ASC 205-40, 230, 326, 340-40, 350-40, 450, 606, 718, 730, 820, 842, 985-20)
• FASB, ASU 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements (opens in a new tab): removes the project-stage model; effective for annual periods beginning after 15 December 2027
• FASB, Concepts Statement No. 8, Conceptual Framework for Financial Reporting (opens in a new tab): qualitative characteristics; neutrality over conservatism
• FASB, ASU 2014-02, Accounting for Goodwill (private company alternative) (opens in a new tab): 10-year goodwill amortization election
• IFRS Foundation, IAS 2 Inventories (opens in a new tab): no LIFO; lower of cost and NRV with reversals
• IFRS Foundation, IAS 38 Intangible Assets (opens in a new tab): research vs development criteria
• IFRS Foundation, IFRS 16 Leases (opens in a new tab): single lessee model
• IFRS Foundation, IFRS 18 Presentation and Disclosure in Financial Statements (opens in a new tab): replaces IAS 1 from 2027
• IRS, Rev. Proc. 2025-32 (opens in a new tab): 2026 inflation adjustments, including the $32 million §448(c) gross-receipts test and §179 limits
• IRS, Publication 538, Accounting Periods and Methods (opens in a new tab): cash vs accrual rules and changing methods
• IRS, Rev. Proc. 2025-28 (opens in a new tab): procedures for the new §174A domestic R&E deduction and the small-business retroactive election
• IRS, How long should I keep records? (opens in a new tab): retention periods
• IRS, Tangible property final regulations (opens in a new tab): de minimis safe harbor ($2,500 / $5,000)
• IRS, Independent contractor (self-employed) or employee? (opens in a new tab): common-law classification tests
• SEC, Staff Accounting Bulletin No. 99: Materiality (opens in a new tab): qualitative materiality and the limits of the 5% rule of thumb
• SEC, Beginners' Guide to Financial Statements (opens in a new tab): plain-English introduction to the statements
• AICPA, Statements on Standards for Accounting and Review Services (opens in a new tab): preparation, compilation and review engagements (AR-C 70, 80, 90)
• Luca Pacioli, Summa de arithmetica, geometria, proportioni et proportionalita (Venice, 1494): first printed description of double-entry bookkeeping
• Kieso, Weygandt and Warfield, Intermediate Accounting (Wiley, many editions): the standard US GAAP textbook
• Financial statements: Acme's full statements, ratio analysis and how to read a 10-K