The Accounting of Construction Company
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- May 23, 2022
- By Michael Williams
- in Business
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While it’s easy to get caught up in the day-to-day activities of running a construction company, the accounting of a construction company requires a slightly different approach. While regular businesses use ordinary accounting principles to keep track of all expenses, construction companies are on the move and perform customized work on multiple locations daily. They must account for these differences to accurately determine the profit and loss of their company. Here are some tips to keep your construction company’s books up-to-date.
If your company is a small construction firm, cash basis accounting can be used. This method records revenue as it is received and expenses as they are incurred. You must allocate your expenses evenly over the duration of the benefits to the business. While cash basis accounting is more convenient for small construction companies, this method cannot be used by large firms with annual revenues of more than $25 million. As a result, the financial statements of your construction company will be misleading.
It is important for your construction company to account for expenses correctly, as they can vary considerably. Attributing expenses correctly is crucial for controlling costs and determining the profitability of a construction project. Job costing ensures that all expenses are accurately attributed to the correct job, which makes it easy for your accounting team to keep track of every dollar spent. This system is also a useful tool in calculating your overall profit margin. The construction industry is not exempt from the tax code, and you must comply with local regulations and wages to stay in business.
One method that helps contractors keep track of their finances is percentage of completion. The percentage of completion method allows contractors to recognize revenue over time. Contractors bill for their work in stages, recording their expenses and earned revenue at each stage. Banks generally prefer this method because it is easy to track profitability even if the project doesn’t proceed. The percentage of completion method is a good option if your estimates are accurate. It’s also a good option if you have accurate estimates and are confident that you will be paid regardless of whether the project is completed or not.
Another method is known as revenue recognition, which helps contractors determine when to record expenses and revenue. Both methods require different accounting practices, and the best one for your construction company depends on your business and the size of your business. The cash method is more commonly used by small businesses. However, for bigger contractors with larger revenues, they will have to use the accrual method. When it comes to revenue recognition, many small construction companies use the percentage of completion method because it allows contractors to measure their gross profits and losses on a project’s estimated completion date.
Whether you prefer the accrual or cash basis method, construction accounting can be complicated. Using the correct method for recognizing revenue and costs can impact your tax returns. As a construction company, your accounting should take into account the type of project you’re working on as well as the varying materials and labor costs. Additionally, you’ll have to handle change orders well to maximize the profitability of your construction project. In addition to the basic accounting of construction companies, the construction industry also has many specialized areas.
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