Cash vs. Accrual & the Contractor Chart of Accounts

Welcome

Hello, and welcome. This is Super Structures General Contractors — a national general contractor headquartered in Powhatan, Virginia — here to help you and your clients build something that lasts. We're glad you're with us, and we look forward to connecting with you.

Alright, Cash vs. Accrual & the Contractor Chart of Accounts. Don't let the plain title fool you. Here's the part that actually matters on the job: Use a construction chart of accounts on an accrual basis — generic books can't do job costing or WIP. Learn it well and you'll know which jobs make money long before your tax return tells you.

Good books are how you know whether you are actually making money, and they are how a bank judges you when you ask for a line of credit. This lesson covers the two ways to keep books and the account structure that makes construction accounting possible.

Cash basis and what it hides

Under cash basis, you record income when the check clears and expenses when you pay them. It is simple, and it is how many small contractors start. The trouble is what it leaves out:

• A deposit on a job you have not started shows up as income.
• Unpaid sub invoices and supplier bills are invisible until you pay them.
• Retainage the owner is holding does not exist in the books.
• A month with big collections looks great; the month you pay the subs looks terrible, even if the work was the same.

Cash basis tells you where the cash is. It cannot tell you whether the job is profitable.

Accrual basis and why contractors need it

Under accrual basis, you record revenue when it is earned and costs when they are incurred, whether or not money has moved. Sub pay apps are booked as payable the month the work was done. Billings to the owner become receivables. Retainage sits in its own accounts. The result is a truer picture of each job and of the company, and it is what lenders expect when they ask for financial statements. Many contractors keep accrual books for accuracy and a cash-flow view for liquidity, which is the right habit; one set of books can produce both reports.

Book method and tax method are not always the same. Your CPA may file taxes on a different method than your financial statements use. That is normal; what matters is that the books themselves are accrual.

The construction chart of accounts

A chart of accounts is the list of accounts the books are organized around. A retail chart has sales, cost of goods, and expenses. A construction chart is built around jobs:

• Assets — cash, contract receivables, retainage receivable, and costs and estimated earnings in excess of billings (underbillings).
• Liabilities — accounts payable, retainage payable to subs, accrued payroll, and billings in excess of costs and estimated earnings (overbillings).
• Revenue — contract revenue, usually separated by division or job type.
• Direct job costs — split into the five cost types: Labor, Material, Equipment, Subcontractors, Other (the LMESO buckets).
• Indirect job costs — costs that benefit jobs but not one job: project supervision, small tools, safety, shop and yard, equipment ownership.
• General and administrative (G&A) — office rent, office salaries, insurance not tied to jobs, marketing, professional fees.

The underbilling and overbilling accounts are the ones generic software does not have. They come straight from the WIP schedule covered later in this course, and without them a contractor's balance sheet is wrong every month.

Direct, indirect, and overhead

Keeping these three separate is what lets you answer two questions: what did each job make, and what does it cost to run the company? Direct costs trace to one job. Indirect job costs get allocated to jobs by a rate — a percentage of direct labor or a charge per labor hour. G&A stays off the jobs and is recovered through the markup in every bid. Mix them up and your gross margin by job is meaningless and your overhead rate for bidding is a guess.

The job cost ledger ties to the general ledger

The general ledger holds totals: one account for job labor, one for job materials. The job cost ledger holds the detail — every dollar by job, cost code, and cost type. The two must agree to the penny every month. When they do not, someone coded a cost to a job but not the account, or to the account with no job. Reconciling them is the bookkeeper's monthly discipline, and it is the first thing an outside accountant checks.

Going Deeper (Intermediate)

Account numbering keeps the chart usable. A common pattern runs 1000s for assets, 2000s for liabilities, 3000s for equity, 4000s for revenue, 5000s for direct job costs, 6000s for indirect job costs, 7000s for G&A, and 8000s for other income and expense. Within direct costs, one account per cost type is enough; the job cost ledger carries the detail by cost code, so the chart does not need an account for every trade.

Two accounts deserve special care. Retainage receivable is money you have earned but cannot collect until the contract says so, and it can quietly become most of a job's profit. Retainage payable is money you owe subs on the same terms. Keep both out of regular receivables and payables so your aging reports reflect what is actually due.

Advanced / Pro-Level

Revenue method drives everything above the gross profit line:

• Percentage-of-completion recognizes revenue as the job progresses and is the method lenders expect under GAAP for most contractors.
• Completed-contract recognizes revenue only at the end. For tax purposes the IRS allows it, along with cash basis, for contractors under an inflation-indexed average-gross-receipts threshold that has sat around $30 million in recent years, and for certain short or home-construction contracts. Confirm the current figure with your CPA.
• Long-term contracts above that threshold generally must use percentage-of-completion for tax.

Pros also keep equipment in its own cost center: ownership and operating costs go in, jobs are charged an internal hourly or monthly rate, and the difference tells you whether owning that machine beats renting. And they build the chart so reviewed or audited statements can be produced without reclassifying everything in April, because accrual books plus a clean WIP are the price of admission to larger work and larger credit lines.

Practice Challenge

You collect a $50,000 deposit in December for a job you will build in the spring. Under cash basis versus accrual, when is it revenue, and which gives the truer picture? (Answer: cash basis books it as December revenue, which is misleading because you have not earned it; accrual books it as a liability — customer deposits or billings in excess of costs — until you perform the work, which is the truer picture and keeps December's profit honest.)

In Practice

A contractor whose books are set up like a retail store can see the bank balance and not much else, so every job feels profitable until the year-end surprise. A contractor with a construction chart of accounts on an accrual basis sees gross profit by job every month and knows which crews, job types, and customers actually pay the overhead.

Common Mistakes to Avoid

• Using generic small-business books with no job cost ledger
• Running cash basis and reading the bank balance as profit
• Mixing personal and business finances
• Lumping supervision and equipment into office overhead
• Letting the job cost ledger drift from the general ledger

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

Educational content — not legal, accounting, tax, or contractual advice. Accounting methods, tax rules, and reporting requirements vary by state and change over time; verify with your CPA, your contract, and the agencies that apply to your work.