Setting Up Item Codes for Contractors

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A common problem for contractors is setting up item codes in their accounting software. Most accountants and bookkeepers fail to fully understand the concepts behind item codes and how it works with the construction industry. This article is designed to explain to you the underlying concepts and how to set up item codes for contractors.

To understand the concepts of item codes, first the reader must understand the three methods of construction accounting. With this knowledge of the three forms, the creation of item codes becomes clear with how to set them up. I’ll finish with a few examples and how the accounting unfolds tying the codes to the financial reports.

Three Methods of Construction Accounting

Accounting textbooks will tell you there are only two methods of construction accounting. The reality is that there are three. I’ll explain the two textbook methods first then tell you about the third.

The first and most commonly used method is referred to as the ‘Completed Contract Method’. Simply stated,

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