Regular accounting is focused on Total Profitability of the business, but in Construction it is very important to look at the different levels of performance. Here are some of the examples of how construction accounting is different from regular accounting:
1. Accounting method
There are two main types of accounting methods for regular business: cash basis and accrual. Cash basis allows to record revenues and expenses when the cash is received and when it is spent. Accrual basis is a method of recording transactions when they occur, when the revenue is earned and expenses are incurred, even if the payment hasn’t been received or made out yet. This allows to track the receivables and payables.
Construction business owners have a lot of projects and jobs in process that vary in length and custom details. It is very important to know exactly how much was spent on each project and how much revenue has been generated. Job costing method becomes a necessity for construction businesses, because it helps to allocate the direct and indirect costs and revenues for each project. This ensures that all overhead expenses are covered and the profit is made.
Another useful method of accounting for construction industry is percentage of completion, that allows contractors to determine if a specific project is on track to make profit.
Completed Contract method allows to report the income only after the project’s completion. This is a good approach to take for the short term contracts. Contractors can differ their taxes until the project is completed, but that may bring in the challenge of gaining investors for your projects, as you wouldn’t have valid records to show.
Regular business would genuinely have 1-5 categories of products and services, when in construction there up to 100 different categories.
3. Cost of goods sold
In construction business, every job has to have direct and indirect costs recorded into hundreds of categories correctly.
4. Break even
In regular business, the break-even point relates to income and expenses, but in construction most projects are custom jobs with variety of associated costs.
Being able to track costs and categorize them to the appropriate accounts, run reports and budget is very important in construction business. It helps to understand which projects are profitable, how to bill clients and how to bid on projects. Daily reports are ideal for the clear process.