Cash vs Accrual Method of Accounting for Contractors

Cash VS Accrual method for contractors

Choosing the right accounting method is one of the most important financial decisions a construction company makes. The method you use affects not just how profit is reported but also how your bonding company, CPA, and banker evaluate your business.

For contractors, understanding cash vs. accrual accounting is essential for financial management, tax planning, and surety bonding success.

1. The Cash Method: Simple but Limited

Under the cash method, income and expenses are recorded only when money changes hands.

• You record income when you get paid.

• You record expenses when you pay bills.

This method shows how much cash is available at any point in time, making it simple for smaller contractors or sole proprietors.

Example: If you send an invoice for $50,000 in December and get paid in January, you recognize that revenue in January, not December.

Advantages:

• Easier to manage and understand

• Good for tracking short-term cash flow

• Often preferred for smaller contractors with less than $25M in annual revenue

  
  

Disadvantages:

• Can distort profitability when projects span multiple months

• Does not match revenue to the period when work is performed

• Provides limited insight for bonding, forecasting, or growth planning

  
  

2. The Accrual Method: A True Picture for Construction

The accrual method records income when it is earned and expenses when they are incurred — even if no cash has changed hands yet.

This gives a more accurate view of project performance and company profitability. It aligns revenue with the work completed, which is critical in construction where projects often last months or years.

Example:If you complete $50,000 worth of work in December but are paid in January, you still record that income in December.

Advantages:

• Matches revenue and costs to the correct accounting period

• Provides a realistic measure of profitability

• Required by bonding companies and banks for financial analysis

• Enables use of percentage-of-completion and WIP schedules

Disadvantages:

• More complex to maintain

• Requires consistent job costing and project tracking

• May increase taxable income if receivables are high

  
  

3. The Hybrid Approach

Some contractors use a hybrid method, keeping books on accrual for management and bonding purposes but filing taxes on a cash basis to defer income and reduce tax liability.

This approach offers flexibility — but it must be managed carefully to avoid inconsistencies between internal reporting and tax returns.

4. Why Sureties Prefer the Accrual Method

Surety underwriters rely on accrual-based financial statements to evaluate bonding capacity. It provides insight into:

• Work in progress (WIP) schedules

• Overbillings and underbillings

• Retainage receivable and payable

• True working capital and equity position

Cash-basis accounting cannot provide that level of detail. It may understate your company’s financial strength and limit your ability to qualify for larger bonds.

5. Choosing the Right Method

Accounting Method	Best For	Key Strength	Key Limitation
Cash Basis	Small contractors, short-term jobs	Simple and cash-focused	Inaccurate for long-term projects
Accrual Basis	Growing contractors, bonded projects	True profitability, required for surety	More complex to maintain
Hybrid	Mid-size firms balancing taxes and bonding	Flexibility	Requires strong bookkeeping controls

6. The SuretyCFO™ Perspective

If your goal is to grow bonding capacity, manage projects profitably, and present credible financials, accrual-based construction accounting is the right foundation. It provides the transparency underwriters and lenders expect — and the insight owners need to make smarter business decisions.

Call to Action

Ready to move from cash to accrual accounting?SuretyCFO™ specializes in bookkeeping, tax, and CFO services built around construction bonding. We help contractors implement accrual-based systems, prepare WIP schedules, and strengthen working capital for long-term growth.

📊 Download the SuretyCFO™ WIP Schedule Template📘 Get the Bond Readiness Checklist