For any construction business, its financial health is critically important. There are two general methods of tracking expenses and income: accrual method and cash basis method.
Being on a cash basis is very simple and straight-forward – you must track cash in and cash out, while the accrual method involves a complex accounting process. It might seem that being on a cash basis is the best option, but actually this is also the least accurate accounting method.
Not all construction companies can be on a cash basis. The US law allows this option only for companies whose gross receipts are under $5 million. Also, this accounting method is not recognized under GAAP. Those who use it are generally small contractors, because it suits better their cash reality. They record the flow of money by tracking received payments and expenditures (payments to vendors or suppliers).
Advantages of being on a cash basis include easy book-keeping, no necessary account expertise and the possibility to defer taxes until a future period (as long as the cash is recorded). Payment for construction jobs in Colorado is made easier.
As for the limitation of this method, we mention the fact that, without GAAP approval, it may be difficult for a company to get financing or loans, it is not helpful for decision-making and does not provide an accurate picture of the financial health of a construction company.