Cash vs. modified accrual: which is right for a contractor?
A plain-language comparison of two ways to see revenue, costs and jobs in progress.
The accounting method changes when income and expenses appear in your reports. For contractors, timing can make a strong month look weak—or hide work that is not yet billed. The right view depends on how the company bills, pays and manages jobs.
1. How cash basis works
Cash-basis reports record income when money arrives and expenses when money leaves. It is straightforward and closely follows the bank balance, but deposits and large purchases can make monthly results swing sharply.
2. What modified accrual adds
Modified accrual uses selected accrual features—often customer invoices, unpaid bills or job costs—while keeping other items on a cash basis. It can better match the work performed with the revenue and cost tied to that work.
Quick example
A contractor buys $20,000 of materials in March and receives the customer's payment in April. Cash-basis reports may show a March loss and a large April profit. A modified-accrual view can help management see the materials and related revenue together.
3. Signs you need a clearer job view
A more detailed method may help when projects cross several months, customers pay deposits, suppliers extend terms, retainage is common or owners cannot tell which jobs are profitable.
- Large materials are purchased before customer payments arrive.
- Invoices and bills remain open across month-end.
- Revenue looks uneven even when the crew stays consistently busy.
4. Decide with the whole business in view
Your management reports and tax return do not always need to use the same view. Before changing methods, discuss business size, inventory, contracts, tax filing and reporting needs with your bookkeeping and tax professionals.
Key takeaways
- Cash basis is simple but timing can distort monthly performance.
- Modified accrual can provide clearer job and invoice visibility.
- Review any method change with bookkeeping and tax professionals.
This guide provides general information. Accounting and tax decisions depend on your business’s specific facts; consult a qualified professional.