If you’re a contractor and you want to know more about construction accounting, you’re at the right place. Our simple guide of tips makes it easier for anyone to understand accounting in construction industry. Construction tax accounting is similar to general accounting. It is designed with all the basic principles of it. Accountants for construction industry offer a specific service of full financial management and bookkeeping. But apart from general accounting, this form has some specific features.
Differences in construction accounting
Unlike general accounting, this type of accounting is based only on construction industry. It has specific guidelines related to construction industry. As we all know, most of the construction work that is done needs a specific amount of time which is more than one year. You can also find construction work done in less than a year which is also known as short-term construction and is more manageable. Talking about the first case, it is much harder to manage everything over a long period or an unknown one. That is the sole reason why accounting services for construction companies are different from the general form of accounting. Unlike other producers who manage and try to win profits from the sales they make over time, accountants have a harder job. Profits in construction are simply made based on contracts with custom terms, specifications, and deliverables, and this makes the work more complicated.
Distinct difference is that construction accounting
Another distinct difference is that construction accounting services are based on projects. Each project has its financial focus and plan. Unlike other industries which are predictable, accounting for construction company is full of unique projects from time to time. Construction industry accountants or even contractors need to be aware of every little detail from project to project. That’s where job costing comes to focus as contractors need to calculate accurate costs for projects. Job costing is the process of tracking the cost of materials and labor for a specific job. This process helps with profits and also enables standardized reporting by measuring different aspects of the project. It is made up of individual projects, cost activities, and cost types. Job costing is a specific feature of construction accounting that helps with understanding cash flow better and making it easier for constructors or project managers to maximize profit.
Accounting for building construction
Accounting for building construction includes sales and different expenses that aren’t found in general accounting. This makes it easier for constructors to manage everything in detail as projects leave no place for mistakes to happen. These sales are usually divided into different categories which might include: rental/sale income, renovation income, or construction income. And expenses on the other hand should be calculated individually for each project to avoid errors later on. There is also another way of dividing categories based on cost, by which you usually get: direct costs, indirect costs, and committed costs too.
Since projects in construction work need a long time to end, there are also many contracts made which are long-term and need a certain type of tracking. This is another distinct feature that only construction accounting has. Accountants for construction industry are responsible for tracking all the expenses that usually come up with these long-term contracts.
Methods of construction accounting
We wrote about differences in this type of construction but what about going deeper into this category as well? Construction accounting services include several methods of accounting and it is best to find the one most suitable for you or your chosen contractors and accountants.
The most popular one is the cash method. This method simply allows accountants to track down expenses made by contractors on spends and receives. Contractors on the other hand are responsible for tracking down only when spending income on things like the cost of materials and also different equipment. They have to record revenue once they got the payment from their clients. This is the most popular method as it is widely preferred by contractors since it gives them space to manage everything better without having to generate multiple accounts.
Accrual method in Construction Accounting
With this specific method, you have to keep in mind that revenue is recognized only after the specific service is performed. Expenses are also recognized once they are incurred. This method helps give a general idea for site accountant in construction company to know how much profit the company will have.
Percentage of completion method in Construction Accounting
This method is great as it allows contractors to send their invoices every once in a while when they reach a specific amount of work done. Their payment is divided into small percentages and once they finish one part they get a percentage of the total payment. This is a secure method for both parties.
Fixed price method in Construction Accounting
This method is usually used when the client has to choose from multiple contractors which one offers the best deal. It allows contractors to give an exact price to their clients from the introduction of the project is made. This method favors the clients more and makes the constructor responsible in case of exceeding the initial estimate.
ASC 606 STANDARDS in Construction Accounting
It is best to know that construction business accounting includes a revenue recognition standard under this specific name. It requires companies to track everything only in one specific method of their choice. The main purpose of this standard is to create a better understanding of a company’s financial situation so everything that needs to be reported is done in a standardized way.
Now that you have a general idea about construction accounting you might want to know more. We provide you with other tips and information on our website relating to different aspects of CIS scheme and much more. And in case you need some help with accountants in construction industry look no more. Save your time and call us. We provide you with an expert team of professionals who are ready to help you with everything. Our accountants will be ready to keep full-package management for you and your construction company. Everything you need is one call away.