To run a profitable company, it’s important to know how you’re doing financially. Maintaining in-depth accounting records can help you keep an eye on your company’s overall financial health and assist with your decision-making. Here are a few things you need to know about construction accounting.
1. Construction Accounting is Different Than Other Types of Accounting
While construction accounting follows standard accounting principles, it has a few additional components that make it more complex than other types of accounting. Construction accounting incorporates progress billings, job costing, and retainage management, among other things. Factors like cost of goods sold, overhead, and project-based work are also handled differently in the construction industry.
2. You Need a Plan for Revenue Recognition
For other industries, revenue recognition typically takes place when an item is sold. For construction accounting, it’s normal to recognize revenue using other guidelines. While there are a few different options for recognizing revenue, it’s essential that your company decide on and stick to a single plan for revenue recognition to minimize confusion and encourage consistency.
3. The Percentage of Completion Method is Frequently Used for Construction Accounting
The percentage of completion method for income recognition is often used by construction companies due to the intricacies of construction jobs. Instead of recognizing taxes, expenses, and revenue at the beginning or the end of a project, these items are adjusted based on the completion of the project.
For example, if a project is 60 percent of the way complete based on the terms of the contract, then 60 percent of the income, expenses, and taxes should be recognized.
Another method known as the contract completion method may be used on a more limited basis. This method recognizes all income, expenses, and taxes once the project is complete. One downside to this option is that it doesn’t follow generally accepted accounting procedures.
4. Job Costing is Essential for a Construction Company’s Accounting
Generally, the goal of a construction firm is to ensure that every job is profitable. To increase the odds that a project is profitable, it’s vital to use accurate job-costing procedures that assign the correct amount of labor and materials to the job. Changes in the project and the costs of the materials must also be meticulously tracked so that the price of the job is adjusted accordingly.
5. Accounting Reports are Helpful for Monitoring the Health of Your Business
Common accounting reports, like cash flow statements, income statements, and balance sheets, are useful for monitoring your company’s financial health. These reports help you see if your business is turning a profit (income statements) or if you have enough cash to cover your expenses (cash flow statements).
These financial reports are most useful when they’re accurate and up-to-date, making consistent, precise accounting procedures even more important.
6. Handling Your Company’s Accounting Can be Time-Consuming
For most construction professionals, handling their own accounting is a time-consuming, laborious process. It takes time to understand the specifics of construction accounting rules, and even then, you may not know if you’re properly handling an expense or payment.
Get Expert Help with Your Construction Accounting
Instead of spending valuable time handling your own construction accounting, let an experienced group of CPAs, like Gurian CPA Firm, handle your accounting tasks. You’ll have more time to focus on running and growing your business, and we have experience providing accounting services for a variety of industries. Contact us to request a meeting.
