An Introduction to Construction Accounting

An Introduction to Construction Accounting

MarketWatch reported in July 2021 that construction accounting software companies should expect to continue earning profits. Even with a pandemic, building homes or commercial properties continue to enjoy a bull market.

During boom times or recessions, construction accounting can have unique challenges. When your business depends on projects, having the best accounting software and staff becomes essential.

If you’re entering this world without previous experience, you need to set some expectations. The good news is that you can introduce yourself to a new world of accounting software and methods by reading this article today.

Construction Accounting Methods

There are four types of accounting methods often used in the construction industry. You can choose from the following:

Cash

Using cash accounting means recording receipts as they’re received. Additionally, expenses get entered at the time when they get paid. Overall, the most crucial piece to understand is that AP and AR file transactions as people take action.

Accrual

Accrual accounting records events when the transactions clear instead of when the action gets taken. This method has the benefit of recording the confirmation instead of the activity itself. QuickBooks and other accounting systems have options that support this technique if you go in this direction.

Completed Contract

A completed contract method of accounting remains common. This choice usually occurs because both income and expenses do not get recorded until the contract concludes.

Percentage-of-Completion

If your projects tend to last from one period to another, you may want to consider percentage-of-completion accounting. Using this method, clerks report the transactions based on the progress of each construction team.

The Importance of Job Costing

The vast majority of construction companies rely on job costing to determine their profits. This accounting task is crucial because it keeps track of the revenue and the costs for each job. The complexity alone is stressful enough to want a demo of industry-specific software from places like getbuilt.com.

The actions required to complete accurate job costing include the following:

Materials

When you move materials, job costing tracks the activity. Whatever you need for each job gets assigned to track this critical part of your profitability. According to The Blueprint, there are multiple ways to make these calculations.

Labor

Everyone knows that labor is the most expensive part of construction costs, and you need the ability to track your costs for every job. However, job costing also puts these costs into a pool that gets assigned to your open contracts.

Overhead

Anything that’s a non-direct cost for projects goes toward the overhead cost pool. During the steps that follow, these numbers go toward the jobs a company needs to complete.

The First Step Toward Construction Accounting

The basics of construction accounting involve choosing a method of accounting and a focus on job costing. With this knowledge, you’ve taken the first step toward understanding the tasks that can follow. If you want more details on how everything works, you will want to deep dive into the best advice available.

Do you want to learn more from our blog? Check out more of the world-class accounting content available on our site today!

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