How to Create a Chart of Accounts for Construction Company and Contractor

Keeping track of all money moving in and out of your construction business can be challenging and time-consuming, that is why you need to create a chart of accounts. It will allow you to track every transaction by category and subcategory.

Put simply, a chart of accounts (COA) is the foundation of an accounting system of a construction company. A chart of accounts for construction companies provides the structure to organize financial transactions. It’s a key component of a company’s financial recording and reporting system.

Explore the definition of a chart of accounts for construction company and find out how to create a chart of accounts with our comprehensive guide.


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What is a chart of accounts?

A chart of accounts consists of all the financial accounts in your company’s general ledger. This organizational tool allows you to break down all the transactions that your company conducted during a specific accounting period into different subcategories. Each subcategory has to correspond to the structure of the construction company’s financial statements.

By separating out your expenditures, revenues, assets, and liabilities, a chart of accounts enables you to gain insight into the effectiveness of your business’s area. Not only used to organize finances, but your construction company also uses it to give interested parties, such as investors and shareholders, a clearer insight into your company’s financial health.

Sample chart of accounts for construction

Here is a basic sample list of account numbers that provides the skeleton of the financial reporting system:

1000 Assets

1001 Current Assets

1701 Long-term Assets

2000 Liabilities and Equity

2001 Current Liabilities

2501 Long-term Liabilities

3000 Income and Direct Expense

4000 Indirect Expenses

5000 Financing Expenses

6000 Sales and Marketing Expenses

7000 Rental Operations Expenses

8000 General and Admin Expenses

9000 Other Income and Expenses

The accounts in the list above provide the structure for the construction company’s financial statements and are tailored to provide the information needed on those reports. Common reports for a construction company include income statements, balance sheets, and work in progress reports.

How a chart of accounts works in construction

Construction companies use a chart of accounts to organize financial transactions in order to build financial statements. When a transaction is entered, it becomes recorded in a double-entry system. Financial statements summarize these transaction amounts for a given time period.

Based on the type of work your construction company performs and how income is recognized, the accounts fall into the corresponding categories. For instance, material suppliers and equipment company rental companies are going to have very different charts of accounts than a contractor.

COAs can vary and be tailored among construction companies, no two companies are exactly alike. Each company develops its own COA based on its requirements and operation. However, they also comply with the guidelines set out by the Financial Accounting Standards Boards (FASB) and Generally Accepted Accounting Principles (GAAP).

Once the overall structure of the chart is established, it is kept the same from year to year. As a result, it ensures that accurate comparisons of the company’s finances can be made over time.

Why construction businesses need a chart of accounts

The chart of accounts for construction is very important for several reasons.

As mentioned, the most important role is to provide you with a clear picture of the financial health of your construction company.

When you record full details and track every transaction, you know exactly where your construction company is marking and spending money. Everything from a new bank loan to an invoice from a supplier is recorded in appropriate categories, making it easier to find.

How to create a chart of accounts for a construction company

Before you start building your own COA, there are some key components that will help you shape your account structure – regardless you are a supplier or contractor, you need to recognize income and track indirect expenses.

Material suppliers and contractors need two different COA structures. For suppliers, the account structure is much simple than a contractor because they recognize income when they sell materials. Meanwhile, contractors have to keep track of the progress of projects. Also, contractors have more complex income streams and generally are recognizing their income based on completion of work.

Recognizing income

There are two fundamental ways to recognize income in construction, including completed contract or percentage of completion.

The first recognizes income when a project is totally complete and the invoice is sent at the end. On the other hand, the percentage of completion recognizes income at regular intervals as the project progresses.

>> Learn more about Percentage of Completion and Completed Contract Methods

Tracking indirect expense

Indirect expenses are expenses that provide support to the construction of projects but aren’t specific to any one entity. They can include rent, phone bills, advertising, legal fees, labor burden, or travel expenses. Some companies consider these expenses as administrative expenses and others track them as indirect job expenses.

And now you’ve figured out what type of company you are (supplier and contractors) and determined how you recognize your income, and whether you want to track indirect expenses, you can organize your COA

Basic account categories

While COAs can vary from company to company, there are some basic categories that will be reflected in your financial statements, including the balance sheet and the income statement.

In a chart of accounts, accounts are shown as the order they appear on your financial statements. Assets, liabilities, and shareholder’s equity (balance sheet accounts) are shown first

Assets

  • Assets accounts belong to the first category on your chart of accounts

  • Bank accounts: checking and savings accounts

  • Accounts receivable: amounts owing to you for work performed

  • Retention receivable: amounts owners are holding until work is completed

  • Equipment/land/buildings: any other assets your company owns that help you do your work

  • Underbillings: when you bill less than you’ve completed (percent complete income recognition)

  • Inventory: material suppliers’ inventory on hand, developers land and work in progress

Income

  • Sales: income from project or material sales

  • Interest income: income earned from interest on bank accounts or other investments

  • Over/under billings adjustment: necessary adjustments to make income match percent complete

Expenses

  • Administrative costs: admin labor, software

  • Office expenses and rent: building rent, office supplies, postage, shipping

  • Taxes: business income taxes and sales tax

  • Insurance: general liability, automotive, workers comp, and umbrella coverages

Indirect expenses

  • Vehicle expense: costs for fuel and maintenance for vehicles driven by field personnel

  • Phones: costs for equipment and service contracts for field personnel

Liabilities

  • Customer deposits: customer down payments and interim payments when using the completed contract method

  • Accounts payable: amounts owing to vendors for materials, equipment, subcontractors

  • Retention payable: amounts owing to vendors held until work is completed

  • Loans: company or project loans outstanding

  • Overbillings: when you bill more than you’ve completed (percent complete income recognition)

  • Retained earnings: company profits or losses from the previous fiscal year

Cost of Goods Sold

  • Labor costs: includes wages, benefits, employer taxes

  • Material costs: raw materials for the finished product

  • Subcontractors: trade contractors and others

  • Equipment: cost of rental or owned equipment

Now that you have learned the fundamental parts comprising a char of accounts. You can begin to build your own COA that grows with business with your construction business and helps you succeed. Remember when you’re building a chart of accounts, consistency is key. Try to avoid frequently changing your construction chart of accounts so that you can more easily compare results. Whenever you have a doubt, consult with your professional account to avoid confusion.

Irvine bookkeeping – we’re here to help

Developing your construction chart of accounts can be tricky and time-consuming. Everything from defining an appropriate framework, the complex requirements of the construction industry, revising your chart of accounts regularly can distract you from your main tasks to grow your business and produce revenue.

We’re here to help you build a solid financial foundation for your construction business. Your business’s accounts list and accounting system are personalized to fit your needs. Our dedicated bookkeepers will help you track accurately income and expenses, import reports to assess your company’s financial health.

Now you can fully focus on successful construction projects to stay on top of high revenue-generating construction companies and let us take over your bookkeeping and accounting system. Let get free initial consultation here.


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