Definition
Cash basis accounting records revenue when cash is received and expenses when cash is paid. Accrual accounting records revenue when it is earned and expenses when they are incurred — regardless of when cash changes hands. Most small contractors use cash basis for its simplicity; larger contractors (and those with inventory or long-term contracts) typically use accrual.
Why It Matters
Your accounting method changes what your P&L shows at any given moment. On cash basis, a $50,000 invoice sent but not yet paid doesn't appear as income. On accrual, it does. Cash basis can make a profitable business look unprofitable (big payables, slow receivables) or vice versa. The IRS generally allows small businesses to use cash basis; once revenue exceeds ~$27M/year, accrual is typically required.
Field Example
A contractor completes a $40,000 job in December and invoices on Dec 28. The client pays January 15. Under cash basis: the $40,000 shows up in January (when paid). Under accrual: it shows up in December (when earned). This difference can shift an entire job's profit into a different tax year.
Calculation / Formula (if applicable)
Cash Basis Income = Cash received during period
Accrual Income = Revenue earned during period (invoiced, whether paid or not)
Accrual Expense = Costs incurred during period (billed by vendor, whether paid or not)
Software Application
Allow the user to view reports in either cash or accrual mode. In accrual mode, include unpaid invoices as revenue and uncleared bills as expenses. Flag which method is in use so reports aren't misread.
Tooltip Version
Cash basis records money when it moves; accrual records it when it's earned or owed. Most small contractors use cash basis — but understanding both helps you read financial reports correctly.
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