Month-End Accruals Checklist for Startups to Get a True Picture of Your Performance

Why Your Financials Feel Unpredictable and How to Fix It

Your startup's financial reports feel unpredictable. One month, expenses seem low and profitability high; the next, a single large invoice lands and your burn rate spikes. This volatility makes it nearly impossible to track runway or key performance indicators with confidence. This isn't a sign of a failing business; it’s a sign you’re outgrowing cash-basis accounting.

For founders managing the books in QuickBooks or Xero, implementing a simple month-end accruals process is the key to a stable, accurate view of your company’s financial health. It smooths out the peaks and valleys, giving you and your investors a reliable picture to make critical decisions. The goal is to move from a reactive cash-in, cash-out view to a proactive, period-accurate understanding of your performance.

Foundational Understanding: Getting a True Picture of Your Business

Accrual accounting is fundamentally different from cash accounting. While cash accounting records transactions only when money changes hands, accrual accounting records revenues and expenses when they are *earned* or *incurred*, regardless of payment timing. This method provides a far more accurate measure of operational performance month to month.

This approach is built on the matching principle, which aims to link the costs of generating revenue to the period in which that revenue was earned. This distinction is why your cash flow statement can look very different from your Profit and Loss (P&L) statement. For a growing startup, the P&L built on accrual principles answers the question, “How did we actually perform in May?” not just, “What cash came in or out in May?”

A Phased Startup Accrual Checklist

The level of detail required in your month-end close evolves with your company. Early-stage startups can focus on a few high-impact items, while those approaching Series A or B need a more robust and repeatable process to satisfy investor and audit requirements. This `startup accounting checklist` is divided into two phases: the essentials to start with, and the additions you’ll need as you grow.

The Core Three: What Most Startups Need First

For Pre-Seed and Seed-stage companies, mastering three core accruals provides the most significant improvement in financial accuracy. These are the essentials for getting started.

1. Revenue Recognition: If you sell annual contracts, you cannot recognize all the cash as revenue in the first month. For US companies, accrued revenue principles are the foundation for complying with ASC 606. In the UK, similar principles apply under FRS 102. For a SaaS company, revenue is recognized evenly over the subscription period. For a professional services firm, it may be recognized upon hitting project milestones.
2. As an accrual accounting example, a $12,000 annual SaaS contract signed and paid in January should be recognized as $1,000 of revenue each month. The remaining $11,000 sits on your balance sheet as a liability called "Deferred Revenue" until it is earned. You can learn more about revenue accruals for service businesses and unbilled revenue examples.
3. Payroll Accrual: This is crucial if your pay period crosses the end of a month. For example, if you pay employees on the 5th for work done in the prior month, you must accrue for the salary expense incurred in that month. Missing a payroll accrual can easily swing your monthly operating expenses by 15-20%, distorting your burn rate.
4. To calculate it, consider a monthly payroll of $50,000. If the month ends on a Friday and payday is the following Tuesday, you must accrue for all wages and associated employer taxes earned in that month, even though cash has not yet left the bank. This ensures the expense is matched to the period the work was performed.

As You Scale: More Complex Accruals for Growing Companies

As you grow towards Series A and beyond, your `month-end closing process` needs to become more comprehensive. This rigor is essential to support investor due diligence and potential audits. Miscalculating these items can create compliance issues, as GAAP or IFRS non-compliance is a significant risk of improper accruals.

1. Accrued Expenses for Unbilled Invoices: What about expenses you’ve incurred but haven’t received a bill for, like a legal consultation or a marketing contractor’s work? The best practice for `how to record accruals at month end` is to estimate the expense. The reality for most Pre-Seed to Series B startups is more pragmatic: apply the 80/20 rule and focus on the few large vendors that materially impact your P&L.
2. For example, if you expect a legal bill for around $5,000, you accrue that amount. When the actual bill for $5,200 arrives next month, your P&L for the period was 96% correct instead of being 100% wrong. This method of `recording expenses at month end` ensures a much more accurate P&L.
3. Prepaid Expenses: When you pay for a service upfront for a full year, like an annual software subscription, you create an asset on your balance sheet called a “prepaid expense.” For example, a $2,400 annual subscription to a key software tool paid in January is not a $2,400 January expense. Instead, you would expense $200 each month for 12 months, correctly matching the cost to the period in which you receive the benefit.
4. Sales Commissions: The expense for a sales commission should be recorded in the same period as the revenue it helped generate. This is the matching principle in action. If a salesperson closes a deal in March, the commission expense should be recognized in March, even if it is paid out in April. This provides an accurate picture of your customer acquisition cost for that period.

How to Record Accruals at Month End: A Repeatable Process

Knowing the concepts is one thing, but implementing a repeatable process is what creates value. Founders and their teams need `financial close best practices` that work within their existing tools, primarily QuickBooks and Xero.

• Build a Simple Checklist: Start with a spreadsheet to manage your `month-end closing process`. List each potential accrual: Deferred Revenue, Payroll, key unbilled vendor invoices, and Prepaid Expenses. For each item, note the estimated amount, the calculation method, and have columns to confirm when the journal entry has been posted and when it has been reversed.
• Use Journal Entries: Both QuickBooks (common for US companies) and Xero (common in the UK) handle accruals through manual journal entries. For an accrued expense, you typically debit an expense account and credit a liability account like “Accrued Expenses.” For a prepaid expense, you first debit the “Prepaid Expenses” asset account and credit “Cash,” then make a monthly journal entry to debit the actual expense account and credit “Prepaid Expenses.”
• Remember to Reverse: One of the most `common accrual mistakes` is forgetting to reverse the entry in the following month. An accrual for an estimated invoice is a temporary placeholder. Once the actual invoice arrives and is entered, the original accrual entry must be reversed to prevent double-counting the expense. See our guide on Reversing Accruals: When and How for more details.
• Consider Gentle Automation: While full automation is complex, you can start `automating month-end accruals` for predictable items. For prepaid expenses that are the same each month, like a software subscription, you can set up recurring journal entries in QuickBooks or Xero. This saves time and reduces the risk of manual error.

Ultimately, the goal is consistency, not perfection. Your estimates may not always be exact, but a consistent process will give you a financial picture that is directionally correct and far more useful for decision-making. This disciplined approach builds credibility with investors, prepares your startup for future financial scrutiny, and transforms your financials from a source of confusion into a reliable strategic tool.

See the Cash vs. Accruals hub for more context.

Frequently Asked Questions

Q: What is the most common accrual mistake for startups?

A: The most frequent mistake is forgetting to reverse an accrual in the following accounting period. When an estimated expense is accrued, the entry must be reversed once the actual invoice is received and recorded. Failure to do so results in double-counting the expense, which significantly understates profitability.

Q: How is an accrual different from a provision?

A: An accrual is for a liability that has been incurred but not yet invoiced, where the amount is reasonably certain (e.g., payroll for the last week of the month). A provision is for a probable future liability where the exact amount or timing is uncertain (e.g., a potential warranty claim).

Q: Can I start with just one or two accruals?

A: Yes, absolutely. For an early-stage startup, the best approach is to start with the highest-impact items. Typically, this means focusing on revenue recognition for annual contracts and accruing for payroll if your pay date falls after the month's end. Mastering these two will resolve the biggest distortions in your P&L.

Q: Why is accrual accounting important for fundraising?

A: Investors need to see a stable, predictable view of your startup's performance. Accrual accounting provides this by matching revenues and expenses to the period they occurred. It demonstrates financial discipline and gives investors confidence that your KPIs, like monthly recurring revenue and burn rate, are accurate and reliable.