Under the cash basis, revenue is recorded when the customer pays and costs when you pay them. There are no receivables, payables, accruals or WIP adjustments. Many small contractors use it for taxes (where allowed) and sometimes for their books.
GAAP requires accrual accounting, and sureties and banks generally want accrual-basis (often reviewed or audited) statements with a WIP schedule.
Why it matters
Cash-basis numbers can swing wildly with payment timing and hide unpaid bills and unbilled work. Converting to accrual is a common step when a growing contractor gets its first bond line.
Worked example
At year end a job has $400,000 received and $380,000 paid: cash-basis profit $20,000. On the accrual basis, with $420,000 of cost incurred and 60% complete on an $800,000 contract, revenue is $480,000 and gross profit $60,000 (illustrative).
Common mistakes
- Keeping two separate sets of books for cash and accrual.
- Converting to accrual without bringing in open AR, AP and retainage.
How os.construction handles it
In the accounting preview, the ledger is accrual. Cash-basis and tax-basis report views are not built yet. See Financial reports.