Kruze clients are twice as likely to get acquired as the average startup.  Find out why here
Kruze Consulting Navbar Logo
  • (415) 322-1610
  • Contact Us
  • Accounting & Bookkeeping
    Name
    Startup Accounting

    Maximize Your Startup’s Potential

    Name
    Startup Bookkeeping

    Services for High-Growth Startups

    Name
    Strategic Financial Accounting

    Strategic Accounting Boosts Your VC-Funded Startup’s Financial Future

    Tax Services
    Name
    Startup Tax Services

    Tax Services for VC-Backed Startups

    Name
    Startup Tax Returns

    Filing Tax Returns for VC-Backed Startups

    Name
    Delaware Franchise Tax

    Calculate Your Delaware Franchise Tax

    R&D Tax Credits
    Name
    R&D Tax Credits

    Unlock Your Startup’s R&D Tax Credit Potential

    Name
    R&D Tax Calculator

    How much can your startup save in payroll taxes?

    Advisory services
    Fractional CFO & Advisory

    VC Due Diligence

    Startup M&A Accounting

    Financial Modeling Services

    409A Valuations Services

    Part-Time CFOs Services

  • Pricing
  • Name
    About Us

    Learn more about Kruze Consulting

    Name
    Partners

    Our partners are the best in the business

    Name
    Reviews

    See what our clients say about us

    Name
    Careers

    Join our team of startup accounting experts

  • Early-Stage Tax Tips

    Guide to Seed Stage Tax Returns

    Do unprofitable companies need to file tax returns? Yes! Read our tips now.

    Guide to Seed Stage Tax Returns

    Knowledge base

    Name
    Startup Q&A

    Answers to hundreds of startup accounting, finance, HR and tax Q's

    Name
    Blog

    Expert startup accounting advice (and more)

    Name
    Case Studies

    See how we helped our clients save money and grow their businesses

    Top Financial Tips and Resources for Startups

    Name
    Startup Financial Health Tools

    Tips for setting up scaleable financial systems

    Name
    Free Financial Models

    Free to download financial models

    Name
    C-Corp Tax Deadlines

    iCals with federal, state and local compliance deadlines

    Name
    Best VC Pitch Decks

    See more of the best pitch decks ever used

    Name
    CEO Salary Report

    Data on what CEOs are paid

    Name
    Best Startup Credit Cards

    After working with hundreds of startups, we picked the best credit cards

  • (415) 322-1610
  • Contact Us
  1. Home
  2. Blog
  3. How should a startup account for its first revenue?

How should a startup account for its first revenue?

by
Kruze Consulting Kruze Consulting

Kruze Consulting

Last updated: August 1, 2024
Published: December 8, 2023

How should a startup account for its first revenue?

Collecting your first revenue is an amazing day in a startup. Someone is actually paying you money for something you built. It’s incredible. It’s like the ultimate validation, right? And once you get this first piece of revenue in, then you start thinking, “How do I get more revenue?” But let’s focus on the here-and-now of how a startup should account for its first revenue (and ongoing revenue). 

Start with a contract – the basis of revenue accounting – an agreement between two parties

This will sound somewhat basic, but the first thing you’re going to want to do is sign a contract. You need to have some type of contract that states what you’re going to provide to your customer, such as terms of service and a statement of work. And this is important because you want to have some legal protections in there for both parties. And you really need to just spell out the deal. So a consumer internet company, for example, might embed the contract in the terms of service on your website, or inside the app. 

And your contract process might be as simple as people clicking and using face ID to subscribe to your app inside of Apple. Or if you’re a SaaS company, you’re probably going to send them either a contract through EchoSign, DocuSign, or a similar service, or they click through on your website agreeing to this. For biotech companies, for example if you’re selling to a pharma company or you’re doing a partnership there, it’s probably going to be a much longer contractual process because there’s a lot of IP at stake. But the big thing is, you need to have the terms of engagement there. 

The next step to recognizing revenue is invoicing

And then once you have the contract signed you need to invoice the customer. This is where things get exciting, and there’s also some block-and-tackling here. So a lot of people ask us, “What’s the best invoicing tool for customers?” 

And I have a couple of favorites. Nothing here is world-beating or going to change your life, because it’s not a super complex process. I personally like QuickBooks Online invoicing because it’s already integrated into QuickBooks Online, your accounting system. And so then you can see all the open invoices, which immediately become accounts receivable. You can collect through QuickBooks as well, and mark the invoices paid. Stripe has invested a lot in their invoicing tools in the last year. They still have a little way to go, but I expect (I’m recording this in September of 2021) that in the next six months it will be a really strong tool. It’s perfectly fine right now. Another option is Bill.com, which we actually recommend a lot of times for especially high volume invoicing. And they just made an acquisition of another invoicing tool, so I expect their tool to get a lot better as well. 

There are also a bunch of independent apps you can use to invoice. If you’re super old school, or super in a hurry, or haven’t set any of this stuff up, guess what? You can Google and find an invoice template as a PDF online and send that. Fill it out, send it out. The most important thing is your customer gets that and knows how long they have to pay, what the amount is, and what the services being rendered are. And once they have that, they’re on the clock and it’s time for them to pay you. 

Accepting payments

Now, as you know, you can get paid through wire transfers. If you’re using Stripe, you’re probably going to get paid through Stripe, like an ACH or credit card. The same is true with QuickBooks and Bill.com. 

You can even get a check in the mail. That’s really old school. If you’re getting a lot of checks, I recommend setting up a lockbox service with your bank, where you can actually just give that out to your clients. And the checks will go to the bank. They’ll scan it, deposit it, and make it a lot easier for you so you’re not running to the post office all the time. But in the modern world we live in, electronic payments are always easier. And all of those tools I recommended have really strong, robust electronic transaction capability. So use one of them. 

Cash or accrual accounting?

The next decision you’re going to make about your startup revenue is cash or accrual accounting. Please, if you’re a startup and you’re going to be venture capital-backed, the type of accounting method you want to use is accrual. That will make things so much easier for your friendly accountant, CPA, or Kruze Consulting. It’s also going to make it a lot easier for you, and it’s going to make it easier for your investors. Particularly when they are getting pitched to your company and are trying to figure out, “Is this recurring revenue? What does the monthly recurring revenue and annual recurring revenue look like?” Because everything’s going to be accounted for properly in compliance with GAAP. If you do cash accounting (which wouldn’t be my preference, but some people just need to do that just to get going), you would book that whole deposit, all the cash you get, just as revenue. And your cash account will go up as well. But you can see the problem here, right?

If you are a SaaS company or a pharma company or med tech company, you’re probably doing annual deals or multi-year deals. Well, those revenues need to be spread out over the length of the service provided on a pro-rata basis. And that’s why I like accrual accounting better. Because if you sell a $1.2 million deal for 12 months, you’re going to have $100,000 of revenue every month. And so the sales account is going to show $100,000 every month. You are going to have deferred revenue, which is a liability on your balance sheet, and that gets recognized every month that you provide service. So in the simple example of that 12-month deal, 1/12 of it gets recognized as revenue right away, and then 11/12 sits in deferred revenue. Then the next month, when you provide the service again, you would recognize another 1/12 in the second month, $100,000. And you now have 10/12 (5/6 for you math geniuses out there) sitting in deferred revenue. So that’s how accrual revenue accounting works.

Understanding Revenue Recognition

Revenue recognition is a critical concept in accrual accounting that dictates the criteria for recording sales and non-operating income as revenue. When your startup first starts generating revenue, you, as a founder, need to understand what revenue recognition is and how to do it properly for your company.

It’s important to note that your revenue might not directly match the cash in your bank or your billing activities. For instance, when a customer pays in advance for services yet to be delivered, this payment is classified as a liability, known as deferred or unearned revenue. This liability is only transformed into recognized revenue after the service commitment to the customer is fulfilled. Deferred revenue happens a LOT  for B2B SaaS companies. 

Navigating SaaS Revenue Recognition Challenges

For SaaS  companies, the revenue recognition process entails more complexity. Payments received in advance for services that are spread out over time mean that revenue recognition must align with the gradual fulfillment of the service agreement.

This section aims to clarify the principles of SaaS revenue recognition and the application of these principles across various SaaS revenue scenarios.

Essential Principles for SaaS Revenue Recognition

When a SaaS business enters into a contract for the provision of services or goods, it should align with ASC-606 and IFRS 15 to comply with generally accepted accounting principles (GAAP).

The following five-step process is crucial for SaaS revenue recognition:

  1. Contract Identification: Understand the contract terms.
  2. Performance Obligation Identification: Determine the obligations within the contract.
  3. Transaction Price Determination: Ascertain the price of the transaction.
  4. Transaction Price Allocation: Allocate the price across the contract’s obligations.
  5. Revenue Recognition: Recognize revenue as the obligations are fulfilled.

These standards ensure that revenue from customer payments is recognized in a manner that reflects the delivery of services as stipulated in the contract.

If a customer consistently receives the same service, revenue can be recognized evenly across the contract period. However, if the service level or product changes, the recognized revenue each month may need to be adjusted to reflect these changes.

Efficiently Managing SaaS and Subscription Revenue

Maintaining a revenue schedule helps in tracking the monthly recognized revenue from various contracts. This schedule is vital for adjusting forecasts to prevent overestimation or underestimation of future revenue.

For instance, if a customer cancels their subscription, the revenue schedule should be updated to cease revenue recognition from that contract. Conversely, if a customer upgrades their subscription, the schedule must reflect the increased transaction price and, subsequently, the higher monthly revenue recognition.

Accounts receivable and cash when accounting for revenue

There’s one other little thing on the accounting side. The moment you send that client the invoice after you have the contract and you’re starting to provide service, you can book that as revenue on accrual, and you typically are going to book accounts receivable, and accounts receivable is going to go up. Now, when you collect that cash, you’re not actually really going to touch anything on the sales side because that’s already been booked, but you are going to move your cash account up because your cash increased. And your accounts receivable is going to go down. And both cash and accounts receivable are on the asset side of the balance sheet. 

So one goes up, one goes down. And that’s very common, especially with enterprise companies that are accounting for revenue. They’re almost always going to have an accounts receivable balance, which is perfectly fine and can be a valuable financing tool. When lenders are looking at your company, they’re going to look at your cash. And they’re going to look at your accounts receivable to determine kind of what your current assets are, like your liquidity. So in most cases, accounts receivable is almost as good as cash provided. It’s not like it has aged out. It’s not beyond 90 days or something like that, uncollected. This part of accounting, where the cash and other items on the balance sheet are going up and down, is called “working capital.” We’ve written pretty extensively about working capital – suffice to say, it really starts to impact your cash position and cash burn as revenue grows! So pay attention to it.  

Accrual accounting makes your financials smoother

So remember, ideally you’ll choose accrual accounting for your revenue. That’s how all the best VC-backed startups do it. That’s how Kruze does it. It will make your life easier because your financials are not going to be super bumpy. But the most important thing is to get that contract signed, get the invoice out, and eventually collect the cash. And guess what? You’re on your way. And you can start thinking about how you’re going to sell your second customer and your third customer and so on. And someday you will be a huge success. 

And you will remember these little accounting things you had to learn along the way. I hope that helps. Hit us up at kruzeconsulting.com if you have any questions. Thanks.


Contact Us for a Free Consultation

Get the information you need


Previous Post
Off Balance Sheet Items and Startups
Next Post
How do venture debt overhangs affect equity funding?

Startup CEO Salary Calculator

US Based Companies that have raised under $125M

  Redirecting to results  

Top Articles

  • Pre-Seed Funding + Top 20 Funds
  • eCommerce Accounting
  • Accounts Receivable Loans
  • What is the 2% and 20% VC fee structure?
  • How much does a 409A valuation cost?
  • What are Your VC’s Return Expectations Depending on the Stage of Investment?
  • Fractional CFOS
Kruze on X
Email Us
RSS

How much can your startup save in payroll taxes?

Estimate your R&D tax credit using our free calculator.

r&d tax calculator

Signup for our newsletter

Popular pages

  • SaaS accounting 101
  • Best accounting software
  • Top banks for startups
  • How to account for convertible note
  • Average CEO Pay
  • Startup Tax Returns
  • Best VC Pitch Decks
Related content:
How VC-Backed Startups Can Set Up and Use Credit Facilities
Thu, 24 April 2025
What does additional paid-in capital (APIC) mean for startups?
Sun, 22 December 2024
Guy Kawasaki Pitch Deck: The Ultimate Guide
Wed, 25 September 2024
What is your startup’s cash position?
Wed, 25 September 2024
Also read:
What Are Asset-Light Startups?

What Are Asset-Light Startups?

Discover what asset-light startups are, their advantages, and how to implement this model. Learn strategies for reducing risk, increasing flexibility, and accelerating growth with asset-light businesses.
Wed, 21 May 2025
Brex vs Ramp -  Which card is best for startups?

Brex vs Ramp - Which card is best for startups?

Our CPA team compares Brex and Ramp. Which offers the best card for startups? We look at points, expense management features and more.
Mon, 11 November 2024
Bookings vs Revenue vs ARR

Bookings vs Revenue vs ARR

At Kruze Consulting, we get tons of questions about the difference between bookings, ARR and revenue.
Tue, 9 July 2024
Zero cash date: What it is and how to extend it

Zero cash date: What it is and how to extend it

Scott Orn, Kruze Consulting's COO, shares everything you need to know about your startups' zero cash date and how to calculate it with your burn rate.
Wed, 21 August 2024

Kruze is a leader in accounting services for startups

With over $10 billion in funding raised by our clients, Kruze is a leader in helping funded startups with accounting, tax, finance and HR strategies.

Thank you!

✅ Your request has been submitted.
We will contact you shortly.

Enter your name
Enter Company name
Enter Phone number
Enter Email
Enter Message
 
By clicking Contact Us, you consent to receive automated messages from Kruze Consulting. Reply STOP to opt out. Terms of Service | Privacy Policy.
  • Bookkeeping Services Near Me

  • Bookkeeping San Francisco
  • Bookkeeping Austin
  • Bookkeeping New York
  • Bookkeeping San Jose
  • Bookkeeping Mountain View
  • Specialized Services

  • Startup Bookkeeping
  • SaaS Accounting
  • Best CPAs for Startups
  • Startup Financial Planning
  • Fractional CFOs
  • Startup Fintech Resources

  • Top Startup Banks
  • Brex vs Stripe
  • Brex vs Ramp
  • Best Startup Payroll
  • Top Bookkeeping Software
  • Bookkeeping Resources

  • Startup Chart of Accounts
  • Common Bookkeeping Mistakes
  • Low Cost Bookkeeping
  • Cap Table Software
  • Single Double Entry Bookkeeping

Kruze Consulting Logo Kruze Consulting

Kruze Consulting is a licensed CPA firm; California Board of Accountancy license number 7637

  • Team
  • Pricing
  • Careers
  • Kruze News
  • Reviews
  • Contact Us
  • Security
  • Privacy Policy
  • Terms of Service

Copyright © Kruze Consulting 2025

We may monetize some of our links through affiliate advertising. At any moment, executives or team members may own public or private stock in any of the third party companies we mention.

Do Not Sell or Share My Personal Information

Resources

  • Startup Resources
  • Startup Q&A
  • Case Studies
  • Kruze Blog
  • C-Corp Tax Deadlines
  • Startup Accounting Dictionary

Free Tax Calculators

  • Startup R&D Tax Credit Calculator
  • How Much Does a Startup Tax Return Cost?
  • Delaware Franchise Tax Calculator
  • Burn Rate and Cash Runway Calculator

Startup Tips

  • Startup Expense Management 101
  • 10 Best Banks For Startups in 2025
  • Startup Payroll
  • Best Accounting Software for Startups
  • Startup Tax Compliance
  • How to Pay International Employees & Contractors
  • Startup Bill Pay Service

Locations

  • Austin
  • New York City
  • San Francisco
  • San Jose
  • Santa Monica

Social Media

  • Kruze Consulting on Youtube
  • Kruze Consulting on LinkedIn
  • Kruze Consulting on Twitter
  • Kruze Consulting on Yelp

Industry Expertise

  • SaaS Accounting
  • Biotech Accounting
  • AI Startup Accounting
  • eCommerce Accounting
  • Hardware Accountants
  • CPG Accountants
  • Crypto Accounting
  • Healthcare Accounting
  • Startup Accounting
  Talk to a leading startup CPA
  • Is the content on this page useful?

Thank you!

Your feedback is very important.

READY TO CONNECT FOR A FREE CONSULTATION?

We are the experts at helping seed/VC-backed Delaware C-Corps with their accounting and finances!

Talk to an experienced accountant, not a generic sales person

Alex Janeck Kruze Consulting
Alex Janeck
Edith Silva Kruze Consulting
Edith Silva
Will Martin Kruze Consulting
Will Martin
Viz AI

$250M+ VC Funding Raised


"I had a great experience working with Kruze Consulting when we raised Series A. They know what VCs need to see, and how to present a startup’s books and finances. If you are going to raise venture capital, you need experts like Kruze."
Chris Mansi

Chris Mansi

CEO

Startup Venture Capital Assistance

With former venture capitalists on staff, our team is here to help you navigate the fundraising process and manage your board of directors

Vanessa Kruze Kruze Consulting
Vanessa Kruze
Founder & CEO, CPA
Alex Janeck Kruze Consulting
Alex Janeck
VP of Revenue
Pequity

Scale Remote Operations & Team


"Kruze has supported us above and beyond basic accounting needs by ensuring we have everything we need to expand and support our team wherever they may be located"
Zack Fisch

Zack Fisch

Head of Operations & Legal

Clients who have worked with Kruze have collectively raised over $15 billion in VC funding.

We set startups up for fundrising success, and know how to work with the top VCs.

Vanessa Kruze, CPA Kruze Consulting
Vanessa Kruze, CPA
Founder & CEO
Kruze Logo

Experienced team helping you

Our account management team is staffed by CPAs and accountants who have, on average, 11 years of experience.

Bill Hollowsky, CPA Kruze Consulting
Bill Hollowsky, CPA
VP of Accounting Services
Claudine Vantomme, CPA Kruze Consulting
Claudine Vantomme, CPA
Controller
Morgan Avery Kruze Consulting
Morgan Avery
SUT/R&D Sr. Tax Accountant
Beth Bassler Kruze Consulting
Beth Bassler
Controller, CPA
Protara Therapeutics

Grew from a 2-person startup to a NASDAQ listed public company.


"The Kruze team helped us grow from a 2-person startup to a NASDAQ listed public company in 2 years. We wouldn’t have gotten public without Kruze’s support. Anyone thinking of launching a startup should make Vanessa their first call!"
Jesse Shefferman

Jesse Shefferman

CEO

Kruze Logo

Get in Touch

Please help us connect with you

How can we reach you?

Our first response is typically via email, so please check your inbox.

By clicking Next, you consent to receive automated messages from Kruze Consulting. Reply STOP to opt out. Terms of Service | Privacy Policy.

Help us have a productive first consultation by providing some additional information.

What year was your startup incorporated?

What is your stage of funding?

(pick up from the list)

Approximately how much funding have you raised?

(please enter a dollar value such as 5000000)

Help us understand what you are looking for:

(Optional, click the ones you need)

Anything additional that you’d like to share?

Optional - if you’d like to share anything else to help us prepare for our consultation, please let us know. We are also happy to sign an NDA, just let us know.

Loading search...

Initializing search...

Search

Recent searches: