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Most startups tend to choose cash-based accounting in the early stages of the business. This is primarily because recording income as it comes in is straightforward and easy to understand. While there is nothing wrong with this, businesses that have been around for a while and are starting to expand may face issues with cash-based accounting.
The limitations of cash-based accounting become increasingly apparent as startups grow and their financial operations become more complex. For instance, it can be challenging to track payables and receivables effectively, or to accurately assess the company's long-term financial health. Additionally, cash-based accounting does not meet reporting requirements for businesses with more than $25 million in revenue within a timespan of three consecutive years.
To address these challenges, many startups consider transitioning to accrual accounting with the help of a trusted CPA firm.
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