Cash vs. Accrual & the Contractor Chart of Accounts

Good books are how you know if you're actually making money — and how lenders and sureties judge you.

Cash vs. accrual

• Cash basis — record income when paid, expenses when paid. Simple, but hides money owed and owing.
• Accrual basis — record income when earned and expenses when incurred, regardless of cash. Gives a truer picture and is expected by lenders/sureties.

Contractors often track both views: accrual for accuracy, cash for liquidity.

The contractor chart of accounts

Structure your accounts for construction:

• Direct job costs — labor, materials, equipment, subcontractors (tracked by job).
• Indirect / overhead — office, insurance, admin.
• Contract revenue and billings.
• WIP accounts — costs and earnings in excess of billings (and vice versa).

A construction-specific chart of accounts makes job costing and WIP possible — generic small-business books don't.

Going Deeper (Intermediate)

Two ways to keep books: cash basis (record money when it moves) and accrual basis (record revenue when earned and costs when incurred). Contractors need accrual because cash basis hides reality — you can have a fat bank balance from deposits on work you haven't done.

A construction chart of accounts has structure others don't:

• Direct job costs split into the five types — Labor, Material, Equipment, Subcontractors, Other (the "LMESO" buckets).
• Indirect/overhead (G&A) kept separate from job costs.
• Construction-only accounts: retainage receivable/payable, costs in excess of billings (underbillings), billings in excess of costs (overbillings).

Advanced / Pro-Level

Revenue method drives everything:

• Percentage-of-completion (POC) — recognize revenue as the job progresses (required for most contractors by GAAP and lenders/sureties).
• Completed-contract — recognize only when done; the IRS allows it / cash basis for "small contractors" (under the ~$30M average-gross-receipts exception) and short jobs.
• Long-term contracts generally must use POC for tax. Your job-cost subledger must tie to the general ledger to the penny. Sureties and banks won't bond or lend to a contractor whose books are cash-basis guesswork — accrual + POC + a clean WIP is the price of admission to bigger work.

Practice Challenge

You collect a $50k deposit in December for a job you'll build in spring. Under cash basis vs. accrual, when is it "revenue," and which gives a truer picture? (Answer: cash basis books it as December revenue (misleading — you haven't earned it); accrual books it as a liability/deferred until you perform the work — the truer picture.)

In Practice

A contractor's books set up like a retail store can't track cost-by-job — so they never know which jobs make money. A construction chart of accounts is what makes job costing possible.

Common Mistakes to Avoid

• Using generic small-business books
• Mixing personal and business finances
• Not tracking costs by job

Takeaway: Use a construction chart of accounts — generic books can't do job costing or WIP.

Educational content — not legal, accounting, or licensing advice. Rules vary by state and change; verify with the licensing board and a CPA.