Cash basis vs accrual accounting for contractors

Cash basis records money when it moves. Accrual records it when it is earned or owed. That is the whole distinction, and for most contracting businesses cash basis is the right default.

The reason is not simplicity. It is that cash basis matches how contractors already think. You know what came in and what went out. A set of books that reflects that is a set of books you will actually read.

Where cash basis stops telling the truth

Cash basis has one significant weakness, and in contracting it is not a small one: it does not show you what you are owed.

If you finished $80,000 of commercial work in November and get paid in January, cash-basis books show a weak November and a strong January. Neither reflects what happened. You had a strong November and a collection problem.

The longer your payment cycle, the worse this gets. An electrical contractor doing commercial work on 30 to 60 day terms can have cash-basis books that are consistently a month or two out of phase with the actual business.

This is manageable without switching. A standing aged receivables report alongside cash-basis books gives you most of what accrual would tell you, without the extra work. That is what we do for most clients — and it is why receivables reporting is part of every month rather than something you ask for.

When accrual is genuinely worth it

Four situations change the answer.

A lender or bonding company requires it. This is the most common trigger. Surety bonding in particular usually requires accrual-basis financials, often reviewed or audited. If bonding is in your plans, this is not optional and it is worth setting up before you need it rather than during an application.

Long-duration jobs. If your jobs routinely span months, cash basis will show you a series of unrelated peaks and troughs rather than the profitability of the work. Percentage-of-completion accounting exists for exactly this and it requires accrual.

You carry significant inventory or work in progress. Material bought and not yet installed is an asset. Cash basis expenses it on purchase, which distorts both the month you bought it and the month you install it.

Tax law requires it. There are gross receipts thresholds above which cash basis is not available. They change, and they depend on your entity structure, so this is a question for your CPA rather than something to read off a page.

The hybrid most contractors actually want

In practice, the useful setup for a growing contracting business is usually cash-basis books plus three things accrual would otherwise give you:

• An aged receivables report every month, so you know what is owed and how late
• An aged payables report, so committed costs are visible
• Job-level reporting that attributes revenue and cost to the job regardless of when money moved

That combination answers the questions accrual is usually adopted to answer, without the ongoing overhead of full accrual. It is enough for most owners for a long time.

What we do

Cash basis by default, because it is right for most of the businesses we work with. If accrual makes sense — bonding, financing, longer jobs, a larger commercial book — we raise it after onboarding, once we can see the actual shape of the business rather than guessing from a form.

The decision is easier to make when someone has looked at your books. That is what the free first month is for.

This is general information about bookkeeping practice, not tax advice. Which basis you are permitted or required to use depends on your entity type, revenue and circumstances — confirm it with your CPA.