Startup Accounting Policy Manual: Best Practices

An accounting policy manual is a foundational tool for building a scalable, fundable company. It provides strategic clarity, builds investor confidence, and helps prevent costly delays during due diligence. This document establishes the official rules for your financial reporting, ensuring consistency as you grow.

Early-stage startups often use cash-basis accounting for its simplicity, but this can obscure the true financial health of the business. A shift to accrual accounting is necessary to understand performance, and this is where documented policies become critical. They provide a stable framework for your financial story, preventing the kind of inconsistent reporting that undermines investor trust. For example, a clear policy on cost classification can prevent wild fluctuations in gross margin that are difficult to explain.

The goal is not a perfect, enterprise-grade manual from day one. Apply a “good enough” principle by starting with a simple document that addresses your immediate operational risks. This document can then evolve with your company. The first decision is choosing a framework: most startups follow either US Generally Accepted Accounting Principles (US GAAP) or International Financial Reporting Standards (IFRS), which also informs UK GAAP. The specific rules differ, but choosing one and applying it consistently is what matters. This choice establishes the role of Accounting Standards as the foundation of your reporting. For practical templates, see our guides for US startups or a UK manual.

Getting Started: Three Essential Policies for Your First Manual

To begin, focus on the three policies that ensure your Profit & Loss (P&L) statement is accurate and useful for decision-making. These policies form the core of your financial reporting process.

1. Revenue Recognition

This is the most critical accounting policy for any startup, as it defines the precise moment your company earns and records revenue. Getting this right is central to your valuation, key metrics like Monthly Recurring Revenue (MRR), and investor trust. The policy must align directly with your business model; the rules for a SaaS company differ significantly from those for an e-commerce store.

Revenue Recognition: The accounting principle that determines the specific conditions under which revenue is recognized. For a SaaS business, revenue is typically recognized over the life of the subscription, not when cash is received. If a customer pays $12,000 upfront for an annual plan, you recognize $1,000 in revenue each month. For an e-commerce business using a platform like Shopify, revenue is generally recognized when the product ships and control transfers to the customer.

A clear policy ensures revenue is recorded consistently, preventing inflated results one month and unexplained drops the next. For guidance, IFRS 15 describes a five-step model you can map to your contracts. Our comprehensive guide to Revenue Recognition provides a deeper look at both ASC 606 and IFRS 15.

2. Cost & Expense Classification

Gross margin is one of the first metrics an investor examines to gauge business health and scalability. An inconsistent approach to classifying costs makes this metric unreliable. This policy establishes a clear, defensible line between your Cost of Goods Sold (COGS) and Operating Expenses (OpEx), which is fundamental to consistent Expense Categorization.

Cost of Goods Sold (COGS): The direct costs attributable to the delivery of services or production of goods. For a SaaS company, COGS typically includes server hosting costs, essential third-party data APIs, and salaries for customer support staff. In contrast, OpEx includes sales commissions, marketing spend, and office rent. Setting these categories up correctly in your accounting software, like QuickBooks or Xero, is a critical step.

Documenting these rules prevents errors, such as misallocating marketing spend to COGS, which would artificially inflate your gross margin and mislead stakeholders. Our Cost Classification Policy guide provides a detailed framework. This policy also supports the matching principle, which is further detailed in our Expense Recognition Policy guide.

3. Period-End Adjustments: Accruals and Prepayments

A common cause of unpredictable monthly financials is the failure to match revenues and expenses to the correct period. A formal policy for accruals and prepayments resolves this, smoothing out your P&L and providing a true picture of performance.

Accrual: An accounting adjustment for an expense that has been incurred but not yet invoiced. For example, if your company used $5,000 in legal services in March but the invoice arrives in April, you must accrue a $5,000 expense in March. This matches the cost to the period in which the service was delivered.

Similarly, a prepayment for an annual software subscription should be expensed monthly at one-twelfth of the total cost. Our Accruals and Prepayments Policy guide details these cut-off procedures. These decisions are underpinned by materiality; our guide to Setting Materiality Thresholds helps you focus on what matters.

Scaling Up: Key Policies for a Series A Startup

After a Series A, financial complexity increases. You are buying more assets, hiring more people, and facing greater scrutiny. Your balance sheet becomes as important as your P&L. The simple policies from your seed stage must be supplemented to manage this growth and prepare you for your first financial audit.

Capitalization Policy: Assets and Development Costs

As your company invests in its future, you need a clear rule to determine what is recorded as an immediate expense versus what becomes an asset on the balance sheet. This decision is governed by your capitalization policy.

Capitalization: The process of recording a cost as an asset on the balance sheet rather than an expense on the income statement. A startup might set a $2,500 capitalization threshold. If an asset's cost is above this threshold, you capitalize it; if below, you expense it. A new server bought for $5,000 would be capitalized and depreciated over its useful life, such as three years.

Define your rule in a Capitalization Threshold Policy and formalize your approach in a Fixed Asset Policy. For tech companies, a key focus is development costs. In the US, Section 174 now imposes specific amortization rules you should consider. Depending on your location, you may follow guidance for a UK Software Capitalization Policy or US GAAP Software Development Costs.

Lease Accounting

Signing your first significant office lease introduces complex accounting requirements. Under modern standards, most leases must be recorded on the balance sheet, which can significantly increase your reported assets and liabilities. This is a common source of audit adjustments if not handled correctly from the outset.

Your policy must reflect your governing standard. In the US, ASC 842 typically requires a right-of-use asset and a lease liability on the balance sheet. UK companies following IFRS will need a Lease Accounting Policy Under IFRS 16. This single transaction can alter your company's financial profile overnight.

Stock-Based Compensation

Issuing equity to employees is a powerful tool for attracting talent, but it creates a significant non-cash expense that must be properly valued and recorded over the vesting period. Your policy needs to define how you determine the fair value of these options and the schedule for recognizing the expense. Failing to account for this can lead to a painful correction during an audit. A Stock-Based Compensation Policy provides a clear framework.

Managing Credit Risk

As you serve larger enterprise customers, the risk of non-payment grows. You can no longer assume every invoice will be paid. A formal credit risk policy ensures your accounts receivable are not overstated. This involves assessing customer creditworthiness and establishing a method for estimating potential losses, formalized in a Bad Debt and Credit Loss Policy.

Audit-Ready: Advanced Policies for Governance and Scale

As a startup matures beyond Series B, it faces new operational complexities like international expansion and heightened governance expectations. At this stage, your accounting policies must evolve to manage these new risks and prepare you for an efficient audit process.

Foreign Currency and International Operations

Operating in multiple currencies introduces significant complexity. You need clear rules for handling exchange rate fluctuations. For instance, a UK startup with a US subsidiary must decide its "functional currency." This choice impacts how you handle transaction gains and losses and how you translate results for consolidated reporting. A Foreign Currency Policy is crucial for defining these rules.

Segment Reporting for Multi-Product Companies

When your company expands beyond a single product, investors need to understand the performance of each business line. You need a defensible methodology to allocate shared costs, such as engineering and marketing, between products. A Segment Reporting Policy defines the criteria for reportable segments and the basis for these cost allocations, providing true visibility into business performance.

Related Party Transactions and Governance

As your board and investor base mature, scrutiny of internal controls increases. Transactions between the company and its founders, executives, or major investors are known as related party transactions. These dealings are not inherently improper, but they require careful management and disclosure to prevent conflicts of interest. A Related Party Transaction Policy establishes a formal process for identifying, reviewing, and disclosing such transactions, demonstrating a commitment to robust governance.

Building Your Manual: An Incremental Approach

Approaching your accounting policy manual as a living document makes the task manageable. You can build it incrementally, matching its complexity to the current stage of your company, rather than treating it as an emergency task during a funding round.

You do not need to start from a blank page. Structured templates provide a solid foundation. Our guides on US Accounting Policy Documentation and our UK Accounting Policy Manual Template are designed for this purpose.

The most effective strategy is to follow the stages outlined here. At the seed stage, concentrate on the three essential policies. As you raise a Series A, layer in the policies for scaling. This approach turns a daunting task into a series of manageable steps.

Beyond stating the rule, it is critical to document the "why" behind your decision. A simple sentence explaining your rationale provides valuable context for your team, future finance hires, and auditors. Finally, your policies are not set in stone. Revisit them annually, or after any major business event, to ensure they remain fit for purpose.

Frequently Asked Questions

Q: When is the latest I can create an accounting policy manual?
A: The latest is typically before your first financial audit or during Series A due diligence. Lacking documented policies at this stage causes significant delays, undermines investor confidence, and often forces expensive, reactive cleanup work that could have been avoided with proactive documentation.

Q: What is the difference between accounting policies and internal controls?
A: Accounting policies are the "what" and "why"—the specific principles your company chooses for financial reporting (e.g., how to recognize revenue). Internal controls are the "how"—the procedures and workflows you implement to ensure those policies are followed correctly and consistently by your team.

Q: Do I need an accountant to write my policies?
A: A founder can and should start the process using templates to document business operations. However, a fractional CFO or qualified accountant should review your key policies to ensure they comply with accounting standards (US GAAP or IFRS) and are appropriate for your business model.