The Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) require government contractors to use the Accrual method as opposed to the cash method of accounting, per FAR (48 CFR) 53.209-1(f) SF 1408 Pre-Award Survey of Prospective Contractor – Accounting System.

How does accrual accounting differ from cash basis accounting?

The primary difference between accrual and cash basis accounting rests in the timing of when revenue and expenses are recognized. The cash method is mostly used by small businesses and for personal finances. The cash method accounts for revenue only when the money is received, and for expenses, only when the money is paid out. On the other hand, the accrual method accounts for revenue when it is earned, and expenses goods and services when they are incurred. This method complies with the matching principle of GAAP which works to match revenues with expenses in the periods they were earned and incurred.  The revenue is recorded even if cash has not been received, resulting in an Aging of Accounts Receivable.  The expenses are recorded when the expenses have been incurred even if no cash has been paid, resulting in an Aging of Accounts Payable. Accrual accounting is the most common method used by large businesses and government contractors.