Construction Accounting – The brief
Construction accounting involves the allocation of costs to individual contracts, ensuring accurate project accounting. Each construction project has its own dedicated job in the accounting system. Costs are allocated to the project by assigning them to a unique job number as they are generated. These costs are mainly materials and labor, with additional charges for consulting and architectural fees. Construction projects also incur indirect costs, such as supervision, equipment rentals, support, and insurance. Administrative costs are only allocated to a construction project if the customer authorizes them.
And the Difference about Construction Accounting
Understanding accounting for the construction industry requires a deeper level of analysis compared to other businesses. This is because of the unique characteristics of construction work, such as revenue recognition, project-based pricing, job costing, and the fluctuating nature of operating costs. Construction companies handle a wide range of consumer demands. It is crucial for them to track precise costs, submit bids for projects, handle prevailing wage requirements, and manage various other accounting tasks.
5 Must have tricks for your Construction Accounting Processes
Keep track of your daily financial transactions
To keep track of daily transactions such as accounts payable, accounts receivable, labor costs, and material costs incurred, use a journal, spreadsheets, or construction accounting software. It is important to provide a detailed description of every transaction, along with the corresponding date and the amount of revenue generated.
Using construction invoice templates is a reliable way to bill clients and maintain a written record of construction projects and the revenue they generate.
When using accounting software, it typically can seamlessly integrate with your company’s bank account. This allows for automatic reporting of expenses that pass through the account, encompassing equipment and labor costs and administrative expenses.
Analyze Project Expenses & Job Costing
Just like a financial analyst, you’ll require a method to monitor, classify, and document transactions for every project in construction accounting, which is project centric. Job costing is the term used to describe this process.
Job costing is an approach used to assign costs and revenue to individual jobs. This will not only assist you in getting ready for the fiscal year, but it also offers a precise record of the profitability associated with each contract.
It helps ensure your service costs cover all overhead expenses and guarantees a profit on all your construction projects, just like a financial analyst (FA) would do.
Choosing Your Mode of Revenue Recognition
Understanding revenue recognition is crucial for businesses to determine when they have officially earned revenue from a contract or project.
Revenue recognition is typically straightforward in regular business accounting situations. This is because companies sell a product or service and receive payment right away. You can choose between the cash method or the accrual-based accounting method. However, the way construction companies recognize revenue can be more complex due to the nature of their business.
When it comes to construction accounting, there are several primary revenue accounting methods that companies with long-term contracts typically employ:
- On a Completed Contract Basis: With the completed contract method, revenue recognition for contracts is delayed until the project is finished.
- Progress based Billing: Revenue is recognized under the percentage of completion method based on the project’s progress during the year. This percentage is determined by comparing the expenses incurred and allocated to the contract during the year with the total estimated costs.
Keep a Track of Your Company Spends
Categorize company expenses by service and job to make it easier to track cash inflow and outflow. By utilizing an expense tracker and diligently saving your receipts, you can effectively monitor your expenditures and forecast your earnings for each project.
Typical expenses in the construction industry encompass a range of categories such as business registration, licensing, bank fees, tools, travel, electronics, trade school tuition, vehicle maintenance, phone and internet, lodging, software subscriptions, membership fees, tax write off, insurance, lease payments, safety equipment, subcontractors, employee payroll, and advertising and marketing.
How about an all-in-one Construction Accounting Software
Invoice templates and spreadsheets can only provide limited assistance. To achieve a high level of proficiency in construction accounting and prevent costly errors, it may be beneficial to explore the most efficient construction accounting software.
This will make it simple for you to send invoices online, track expenses, check payment status, generate financial reports, and much more.
Moreover, businesses that utilize construction accounting software are more likely to gain the trust of their clients. This is because accounting software offers a secure and convenient online payment method.
Additionally, you will be equipped with the necessary resources to effectively manage your field force, timesheet and project management processes.
Construction accounting can be a seamless process, improving invoicing, accounting, bookkeeping, and filing tax returns. Having a solid grasp of construction accounting and accurately calculating job costs for each project can greatly enhance the overall efficiency of the process. Staying organized and efficient can be achieved through regular tracking of transactions, balancing accounts, and utilizing construction accounting software.
MetaconstructX is one such software tool. MetaConstructX is built on Microsoft Dynamics 365 Business Central, providing a construction account and project management tool that focuses on maximizing profits, rather than relying solely on spreadsheets.