You finish a $75,000 construction project in September. The customer doesn't pay until November.

So, which month did your company make $75,000?

September, when you completed the work? Or November, when the money finally hit your bank account?

The answer depends on your accounting method.

For contractors, understanding the difference between cash and accrual accounting is important because it affects how you measure profitability, interpret financial statements, and make decisions about your business.

Let's break down how both methods work and why the distinction matters.

What Is Cash Basis Accounting?

Cash basis accounting generally records income when payment is received and expenses when they are paid.

Let's say you're a roofing contractor.

You complete a $20,000 roof replacement in September, but the homeowner doesn't pay until October.

Under the cash method, you generally record that $20,000 as income in October, when you receive payment.

The same concept applies to expenses.

If you receive a $6,000 supplier invoice in September but don't pay it until November, the expense is generally recorded in November under the cash method.

This approach is relatively straightforward because it focuses on money coming in and going out.

However, there is a problem.

The timing of payments doesn't necessarily reflect when your company actually performed the work or incurred the costs.

A contractor could have a strong month operationally but show very little income because customers haven't paid yet.

Alternatively, a month with several large collections could appear unusually profitable even if most of the work was completed earlier.

What Is Accrual Accounting?

Accrual accounting generally recognizes revenue when it is earned and expenses when they are incurred, rather than simply when cash changes hands.

Let's return to the $20,000 roof replacement.

If the work is completed in September and the revenue recognition requirements are met, the $20,000 is recorded as revenue in September, even if the customer doesn't pay until October.

Likewise, expenses are recognized in the appropriate accounting period based on when they are incurred.

This creates a more meaningful connection between the work performed and the financial results reported.

For construction companies managing multiple jobs, accrual based reporting can provide a clearer picture of profitability.

It also supports more detailed financial analysis, including job costing, work in progress reporting, and forecasting.

However, accrual accounting requires more careful tracking of receivables, payables, customer deposits, and project activity.

Accurate bookkeeping is only the beginning. We explain the difference between recording transactions and using financial information strategically in Do You Need a Bookkeeper or a CFO?.

Cash vs. Accrual Accounting: A Construction Example

Imagine your company completes a $75,000 project in September.

The customer pays in November.

For simplicity, assume the entire $75,000 is earned when the project is completed, no advance payments were received, and no special construction revenue recognition rules apply.

Here's how the timing differs.

Both methods can ultimately report the same revenue amount.

The difference is when that revenue appears.

Under cash accounting, November looks like the stronger month.

Under accrual accounting, September reflects the completed project.

For a contractor trying to evaluate monthly production, job performance, and financial trends, that timing difference can be significant.

Why Does This Matter for Construction Companies?

Construction businesses face financial challenges that many other industries don't.

Projects can last weeks, months, or even years.

Materials may need to be purchased before work begins.

Subcontractors might require payment before customers settle their invoices.

Customers may make deposits, pay in stages, or hold back retainage until the project is complete.

These situations make financial reporting more complicated than simply adding up deposits and withdrawals.

Consider a contractor managing five active projects.

Three customers have paid deposits. Two suppliers haven't been paid yet. One completed project is awaiting final payment.

The bank account might look healthy.

But how much of that money is actually available after considering the company's remaining project obligations?

Without properly tracking earned revenue, costs, receivables, payables, and deposits, the owner may not have a reliable picture of the company's financial position.

This is where accrual based management reporting becomes valuable.

Evermore works with contractors on these challenges through our financial management and accounting services for general contractors.

What About Customer Deposits?

Customer deposits are especially important for contractors.

Let's say a homeowner pays a $30,000 deposit for a renovation that won't begin until next month.

Your bank balance increases by $30,000.

That doesn't automatically mean your company has earned $30,000 in revenue.

Under accrual accounting, advance customer payments are generally recorded as a liability until the related revenue is earned, subject to the applicable accounting guidance.

As work progresses, revenue may be recognized according to the company's appropriate revenue recognition method.

For construction contracts, that may involve recognizing revenue over time based on project progress rather than waiting until the entire job is finished.

Tax treatment can be different. Certain advance payments may be taxable before they are recognized as revenue in financial statements.

The key point is that cash received, accounting revenue, and taxable income are not always the same thing.

Confusing these amounts can create problems with project planning and cash flow.

We've explored how this happens in Why Roofers Run Out of Money Between the Deposit and the Supplier Invoice.

Does Accrual Accounting Mean You Don't Need to Watch Cash Flow?

Absolutely not.

A company can report a profit and still run out of cash.

Suppose your construction company earns $150,000 in revenue during a month but collects only $80,000 from customers.

Meanwhile, payroll, materials, equipment payments, and overhead require $110,000 in cash.

Your financial statements may show a profitable month, but you could still face a cash shortage.

That's why contractors need both accurate profitability reporting and cash flow management.

Accrual accounting helps answer:

Are we earning money from the work we're performing?

Cash flow reporting helps answer:

Will we have enough money available to pay our obligations when they're due?

Both questions matter.

Can Contractors Use Cash Accounting for Taxes and Accrual Accounting for Management?

In some situations, yes.

A construction company may use accrual based reporting internally while using an eligible cash method for federal income tax purposes.

However, this isn't automatically available to every contractor.

Eligibility can depend on annual gross receipts, business structure, inventory, contract types, applicable tax elections, and other IRS requirements.

Certain long term construction contracts may also be subject to percentage of completion rules or qualify for specific exceptions.

Changing an accounting method for tax purposes may require IRS approval, including filing Form 3115.

This is why contractors should not change accounting methods simply because one appears to produce a better tax result.

Your accounting and tax professionals should evaluate which methods are appropriate for your business.

Which Accounting Method Is Better for Your Construction Company?

There isn't one universal answer.

Cash accounting may be appropriate for certain smaller contractors with relatively simple operations and short project cycles.

Accrual accounting often provides more useful management information for companies with:

• Multiple active projects

• Significant accounts receivable and payable balances

• Customer deposits and progress billings

• Long project timelines

• Substantial materials and subcontractor costs

• Multiple crews or departments

• Detailed job profitability reporting needs

As a construction company grows, the financial information needed to manage it becomes more complex.

An owner who once made decisions by checking the bank balance may eventually need job costing reports, work in progress schedules, cash forecasts, and monthly financial reviews.

The right accounting system should support the decisions you need to make.

What Should You Do Next?

Start by asking your accountant three questions.

1. What accounting method are we currently using?

Find out whether your financial statements are prepared on a cash, accrual, or modified basis, and whether your tax reporting uses the same method.

2. Are our financial reports accurately showing job profitability?

If you can't identify which projects are making money, your reporting may need improvement regardless of the accounting method.

3. Are we tracking deposits, receivables, payables, and work in progress correctly?

These balances can significantly affect how you interpret your company's financial position.

Understanding your accounting method is a good first step.

Understanding what your financial statements are actually telling you is even more valuable.

Your Accounting Should Help You Run Your Business

Your accounting method isn't just a technical decision for your accountant to make at tax time.

It affects how you interpret revenue, expenses, project profitability, and financial performance.

For contractors, having the right reporting systems can make the difference between guessing how the business is performing and making decisions based on reliable information.

Are Your Financial Reports Telling You the Whole Story?

If customer deposits, unpaid invoices, and project expenses make it difficult to understand your company's profitability, your accounting process may need attention.

Evermore Accounting & Coaching helps contractors build accurate financial reporting systems, understand job profitability, and make informed business decisions.

Discuss Your Construction Accounting With Evermore