10 Expert-approved Construction Accounting Best Practices

how does construction accounting work

For a complete picture of your construction company’s financial health, it’s important to keep an eye on both financial barometers. Construction companies need to track their overall finances in addition to keeping an eye on the financial health of their projects. That means it’s important to keep an eye on the General Ledger and Job Costing in tandem so that you can view a complete picture of your company’s financial health. The first—cash accounting—involves recording income when you receive it and expenses when they’re paid for. Accrual accounting, on the other hand, records income when you earned it, regardless of when the cash actually changes hands.

We have worked with a wide range of construction companies including general contractors, developers, sub-contractors, construction related services companies and more. We understand the intricacies involved in construction accounting even in basic accounting functions such as accounts payable. Construction accounting is different from regular business accounting. These added facets make construction accounting different and require special processes. For most businesses, the accounting general ledger (G/L) is all they need.

What is Construction Accounting?

The completed contract method, which involves calculating how much you owe for each construction project completed during each quarter. Balance sheets, which summarize all of your business’s assets, liability, and owner’s equity. Think of your balance sheet as an overview of the financial health of your construction company and a straightforward way to see when you need to cut costs.

Next up is the percentage of completion approach which is often considered the best accounting method for construction companies. This method provides a more accurate way for accountants to keep track of the expected gross profits and losses of each project. Contractors https://www.newsbreak.com/@cnn-edits-1668599/3002242453910-cash-flow-management-rules-in-the-construction-industry-best-practices-to-keep-your-business-afloat record income and expenses regularly throughout each project and revenue is only calculated for the portion of a project that has already been completed. Contractors often work on and manage multiple projects at once – all of which are in different stages of progress.

Cash balance or cash flow report

The advantage of the accrual method is that it includes accounts receivables and account payables, as a result, provides a more accurate picture of the profitability of a company. The accrual is the most common method used and also a standard method under GAAP acceptance. Contractors record revenue when and only when they receive payment — and report expenses when and only when they actually pay. Therefore, there are no accounts payable (A/P) or accounts receivable (A/R). Under cash accounting, if money didn’t change hands yet, there’s no transaction to account for. The percentage of completion method involves the ongoing recognition of revenue and income related to longer-term projects.

how does construction accounting work