In accounting, the cash method involves recording payments or other sources of income at the time that they are received, while the accrual method allows companies to document anticipated funds at the time that they provide their products and services. Although a construction company may use either the cash method or accrual method to document its revenue, the method required by the Internal Revenue Service may differ depending on the company’s size and scope of operations. Additionally, companies that undertake long-term contracts for non-residential construction projects may be required to complete their accounting activities using the percentage of completion method.
In most cases, companies classified as C corporations that gross more than $5 million annually must use the accrual method. The requirement also applies to companies that purchase and sell income-producing merchandise or materials and, because of this, utilize an inventory process. However, under Revenue Procedure 2002-28, many small companies with a yearly gross of less than $10 million may use the cash method. This applies to construction firms that are not otherwise required to use the accrual method and whose principal activities do not include manufacturing, mining, retail or wholesale trade, or information industries. The protocol also permits companies to forego the traditional inventory methods and simply document income-producing items at the time of sale or payment.