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Why distinguish cash-basis and accrual accounting?
On a construction project, a client may pay an advance before work starts, while the contractor pays for materials before completing a stage. Looking only at money received can make the advance look like earned revenue. Looking only at accrued profit can hide the date when the business will not have enough cash to meet a payment.
Management decisions benefit from two views: cash movements by receipt and payment date, and the financial result of work performed. They answer different questions and complement each other. Tax and statutory accounting follow the separate rules of the relevant jurisdiction and tax regime.
How do cash receipts, revenue and profit differ?
A cash receipt is an actual increase in money in the bank or cash register. It may be a payment for work, a customer advance or a loan. An inflow alone does not establish profit.
Revenue is income from satisfying obligations to a customer, recognized under the applicable rules and contract terms. Under a long-term contract, the recognition date may depend on whether a performance obligation is satisfied over time or at a point in time. The IFRS 15 overview explains those conditions; use the rules of your jurisdiction for statutory reporting.
Profit is the difference between recognized income and the related expenses for a period, using a defined method. For example, if recognized revenue is ₽200, the cost of completed work is ₽100 and other expenses attributable to the period are ₽40, profit in this simplified example is ₽60. The ₽100 difference between revenue and the cost of work is not yet net profit.
Specify what you mean by “turnover”: bank-account turnover, revenue from work and total cash received are different measures. The 101 project balance is also not the amount of money held by an individual participant. To assess liquidity, reconcile actual bank and cash balances separately from project measures.
Suppose a contract is worth ₽2,500,000: the client pays the whole amount in advance, but the work will be completed during the year. The cash-flow report records the whole amount when the advance is received. In the profit report, revenue recognition depends on performance and the applicable method; receiving the advance does not turn the whole amount into profit. Compare your management reports with a cash-flow statement while keeping recognition and payment separate.
How does the cash-basis view work?
For cash control, record a receipt on the day it arrives and a payment on the day it leaves. This view shows how much money is available on a given date and when upcoming payments need to be covered. It helps with a payment calendar and regular obligations such as rent, wages and purchases.
The limitation is that a large advance increases today's cash balance even though some work and future costs are still ahead. A business might receive a ₽10 million advance in November; that does not promise another receipt of the same size in December or mean ₽10 million of profit. Check contractual obligations, the work schedule and future payments before using the funds.
Payment data can help estimate the minimum amount needed for regular cash obligations. It is not enough to calculate the break-even point: you also need comparable-period revenue and a distinction between variable and fixed costs.
How does the accrual view work?
Under accrual accounting, income and expenses belong to the periods they relate to, regardless of when payment occurs. In construction, revenue may be recognized as work is performed or after an obligation is satisfied, depending on the contract and applicable rules. Signing a contract or receiving money early does not, by itself, establish when all revenue is recognized.
This view helps assess the result of work performed even when the client pays later. But accrued profit does not show how much money is in the bank today. Decisions about purchases, payroll and borrowing also need a cash-flow statement and a payment forecast.
What should a construction business use?
For project management, keep both views: planned and actual income and costs for completed work, plus actual and expected cash flows. The choice of tax regime does not by itself prevent an internal accrual-based report. In Russia, the date on which income is recognized for simplified-tax-system purposes is determined, among other provisions, by Article 346.17 of the Tax Code; check the separate conditions for recognizing tax expenses. That tax rule does not make every advance profit in a management report. See the Russian Federal Tax Service explanation of the income-recognition date (in Russian).
This example shows why the two reports cannot substitute for each other. A construction company signs a ₽1,000,000 contract. In December it receives a ₽200,000 loan and pays a supplier ₽150,000. In this simplified example there are no cash movements in January. In February the client pays ₽1,000,000, the company repays the ₽200,000 loan principal and pays ₽20,000 in interest. Opening cash in December is ₽0; there are no other cash flows in the example.
| Cash flow, ₽ | December | January | February |
|---|---|---|---|
| Opening cash | 0 | 50,000 | 50,000 |
| Loan proceeds | 200,000 | 0 | 0 |
| Client payment | 0 | 0 | 1,000,000 |
| Supplier payment | −150,000 | 0 | 0 |
| Loan repayment and interest | 0 | 0 | −220,000 |
| Net cash flow | 50,000 | 0 | 780,000 |
| Closing cash | 50,000 | 50,000 | 830,000 |
Cash rose by ₽50,000 in December because of borrowing, which does not establish profit. The ₽1,000,000 received in February does not determine that month's profit either: calculating profit requires information about work performed and related costs. The table groups principal and interest as a payment for this cash reconciliation; classify them separately in a formal cash-flow report under the applicable method.
In 101, you can record receipts, reports on completed work and purchases against a project, check events, and produce a project cash-movement document. For a company-wide report, add non-project transactions and reconcile with bank and cash records. See the 101 guides to recording receipts (in Russian) and the project report (in Russian). Product records do not replace the required supporting documents or tax records.
