Cash basis accounting records income when you receive payment and expenses when you pay them. If a customer pays you in March, that’s March revenue. If you pay your supplier in April, that’s an April expense. It’s straightforward and matches what you see in your bank account.

Accrual basis accounting records income when you earn it and expenses when you incur them, regardless of when cash actually changes hands. Send an invoice in March, that’s March revenue even if payment arrives in April. Receive materials in February, that’s a February expense even if you don’t pay the bill until the next month.

The difference matters most when there’s a gap between doing work and getting paid or between receiving goods and paying for them. For a service business that gets paid immediately, the two methods produce nearly identical results. For a contractor with 30-day payment terms and materials sitting on site, the results can look completely different. Any bookkeeper American Fork businesses work with should be clear on which method applies so the books make sense.

Consider a general contractor who completes $80,000 of work in December but doesn’t collect payment until January. Cash basis shows zero December revenue and $80,000 in January. Accrual shows $80,000 in December when the work was performed. One method makes December look terrible and January look great. The other shows what actually happened each month.

Construction businesses often benefit from accrual accounting because it aligns revenue with the work that generated it. When you’re tracking job costs and trying to understand which projects are profitable, you need expenses recorded when they’re incurred, not when checks clear. A $15,000 materials purchase that sits on your supplier’s billing terms for 45 days is still a cost of that job the moment it arrives on site.

For contractors serious about understanding margins by project, construction job costing works better with accrual accounting. You see the real cost of each project as work progresses rather than a distorted picture based on when payments happen to clear.

Cash basis has advantages for tax planning. If you’re having a strong year, you can delay invoicing and accelerate payments to shift income and expenses between years. The IRS allows most small businesses under $29 million in average gross receipts to use cash basis, so you’re not required to use accrual unless you exceed that threshold.

Most small businesses start with cash basis because it’s simpler. As you grow and need more accurate financial statements for decision-making, accrual often becomes worth the extra complexity. The key is picking one method and applying it consistently so your financial reports actually mean something.