Which accounting method reports income in the year it is received?

The cash method of accounting is a straightforward and widely used approach, particularly among small businesses and contractors. This method recognizes income and expenses at the time cash is actually received or paid out.

When a contractor completes a job and receives payment, that income is recorded in that tax year, regardless of when the work was done or when any related expenses were incurred. This has significant implications for tax reporting, as it allows businesses to have greater control over their taxable income by timing the recognition of income based on cash flow.

In contrast, the accrual method of accounting recognizes income when it is earned (when the work is completed or services are provided) and expenses when they are incurred, refining the matching principle of revenues and expenses. The modified cash method combines aspects of both, often using the cash method for income but the accrual method for certain expenses. The hybrid method merges various accounting practices, integrating elements of both cash and accrual methods without adhering strictly to one.

Overall, the cash method is favored for its simplicity and immediate reflection of cash flow, making it particularly useful for contractors who may have varying receivables throughout the year.