Construction Accounting

A type of accounting used to identify costs associated with the physical costs of building residential homes or additions.  Construction accounting utilizes either the completed contract or the percentage of completion to accurately report financial results.

Contractor’s Chart of Accounts – Completed Contract or Percentage of Completion Method

Contractor's Chart of Accounts

The  contractor’s chart of accounts is significantly different than the traditional chart of accounts.  First off, the layout is more dependent on the balance sheet than the income statement (profit and loss) accounts.   Furthermore, the income statement accounts are laid out to present a resource based costing presentation than a job costing format.   To add another layer of complexity, the chart of accounts is somewhat oriented to the method of accounting selected by the contractor.

Markup Percentage for Remodelers

Markup Percentage

In the construction industry, remodelers face a different set of criteria than your traditional new home builder.  Because of these issues the markup percentage on costs is generally much higher than other forms of construction.  If you are a remodeler, you need to understand the impact of these issues and how to properly markup your job to cover all your indirect and overhead costs.

Construction Accounting Terminology

Construction Accounting Terminology

In construction accounting accountants and bookkeepers use certain terms and there are distinct meanings associated with these terms.  This article is designed to introduce beginner accountants and contractors to these terms from the perspective of financial reporting.

Branching Out in Construction

Branching Out in Construction

To reduce risk and provide greater security to all parties the small construction company should consider branching out.  What I mean is adding an additional class or line of construction work to the company’s portfolio so that in hard times there are more opportunities for work.

Progress Billings in Construction

Progress Billings

Just like a tip of an iceberg, a progress billing for a construction project is an invoice for a small part of the overall contract value.  It needs to be recorded correctly and presented to management in a way that is understandable and beneficial for making decisions.  This article will introduce the concept and cover how progress billings are presented on the balance sheet.

Construction Accounting – Balance Sheet Construction in Process Accounts

Construction in Process Accounts

Construction accounting consists of three major groups of accounts.  The first and most understood set are the accounts found on the profit and loss statement.  Customarily referred to as Cost of Goods Sold or Costs of Construction, these accounts convey the total costs of construction against the revenue earned for those contracts.  The second major group is located on the balance sheet in the current assets section.  This group is called the ‘Construction in Process’ (CIP) accounts.  The third major group is also located on the balance sheet down in the current liabilities section and is called ‘Construction Billings’ or ‘Construction Deposits and Draws’.  

This article explains the balance sheet accounts related to Construction in Process.  I will explain how they are designed, formatted and presented.  In addition, I’ll explain the impact either the completed contract or percentage of completion method has on the corresponding project’s account balance.  Finally, I’m going to explain to you how to interpret the information presented. 

In another article I will go into detail related to Construction Billings and the corresponding deposits and draws.  This article will focus on the Construction in Process/Progress or what is commonly shortened to CIP. 

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