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Best Practices for Construction Accounting

Updated: Nov 7, 2023

Accounting and financial management is a challenging task in all industries.

TABLE OF CONTENT


Cash Basic

Cash basic accounting is the easiest and simplest method in this list for construction. Accountants will record revenue when received and expenses when paid. Nonetheless, certain precautions must be applied. Even though revenue is recognized and reported, expenses must be allocated evenly over the entire period of benefit when applied to a multi-year contract.


If job materials cover up to more than 15% of the customer’s total cost, construction companies can not use cash basic method. You are also exempt from this rule is your business makes less than 1 million dollars in annual revenue.


Job Costing

Job order costing is a system of expense monitoring in which a business only creates products to fill customer/client orders. Employees complete job order cost sheets for each order and usually separate expenses into three main categories: direct material, direct labor, and manufacturing overhead. Companies in many industries can use job order costing, though a variety of product offerings/services complicates the tracking of expenses.



In the construction industry, it is hard to balance a variety of projects and jobs that vary in length and size. Therefore, job costing is one of the best practices for contractors. It is not only simplifies tax preparation for contractors but also provides efficient tracking of income and expenses across construction projects.



Percentage of Completion

The percentage of completion refers to the ability of the construction company to balance revenue and expenses. This is a challenging method due to the variety of length of projects and number of jobs.


However, it is helpful for contractors to determine whether or not a specific profit is bringing loss or gaining profit. Many construction companies determine their percentage of completion by dividing their actual costs to date by their total estimated contract costs. Then the completion percentage multiplied by the total contract’s gross profit will be the gross profit recognized to date.


 

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Completed Contract Method

In contrast to the percentage of completion method, the completed contract method allow contractors to delay the report of all project revenue until its completion. But it’s possible to have the payment received before the end of the project. This approach is best applied for short-term contracts that can be less than 2 years or have gross profit of less than $1 million. This method also allows contractors to defer taxes into the future period.


Tax Reporting Strategies

Tax law can be complicated and challenging for contractors because it always keep updating and changing. Effective tax preparation and planning can help you to minimize your future tax liability. You may have major differences between your books and tax returns depending on how the company uses the percentage of completion or completed contract method. In addition, when evaluating your short and long-term tax strategies, you must consider determining cash or accrual basis.


Not sure how much your construction business made? Irvine Bookkeeping tracks every dollar that enters and exits each job so you may accurately determine your income.


If you need advice or services on any aspect of bookkeeping, accounting and tax, our specialists are ready to help. Get in touch with us for free quote.

 



 

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