1 2 Accounting for capital projects

Generally, current assets are anything that can generate cash within 12 months, as well as resources required to continue your day-to-day operations or cover current expenses. Asset accounts belong to the first category on your chart of accounts, for example, Cash or Accounts Receivable. When you create your asset accounts, consider all the things your business owns or anticipates to own during the fiscal year.

As changes or discrepancies between the plan and the realization occur, the project schedule and cost estimates should be modified and new schedules devised. Too often, the schedule is devised once by a planner in the central office, and then revisions or modifications are done incompletely or only sporadically. The result is the lack of effective project monitoring and the possibility of eventual chaos on the project site. The supervising architect determines that 60% of the facility is complete in year 1 and 75% in year 2. Under the “percentage-of-completion” method, the net income in year 1 is $780,000 (60% of $1,300,000) less the $700,000 in expenses or $80,000. Under the “completed-contract” method, the entire profit of $100,000 would be reported in year 3.

Construction Partner

Materials are usually straightforward to estimate going into a contract, unless something surprising is found while doing the work. The use of Change Orders to document changes to the original bid can avoid disputes with customers—and construction bookkeeping the original contract or bid should spell out exactly how to handle change orders. Contractors should also establish a standard change order process with full documentation of the work and cost required for each requested change.

Cost of goods sold makes up a substantial portion of a construction company’s expenses. Make sure you are accurately tracking the retainage that is owed to your subcontractors. Retainage is recorded separately from accounts payable, since it is typically not payable in the current period. As the largest expense on your books, labor costs should be diligently tracked and reconciled.

Example 1: Making Payments for Materials

Similar to the initial establishment of such a threshold, before increasing a capitalization threshold, management should ensure it does not have a material effect on the financial statements. It is important that use of such a threshold does not have a material effect on the financial statements. Management should consider the amount and types of costs expected to be incurred to evaluate the impact of using such a threshold.

• By using expert knowledge, your team can ensure accounting practices are compliant, understandable and easy to stick to based on the resources and accounting staff your construction company has available.
• Knowledgeable estimaters and adequate field observations are required to obtain sufficient accuracy with this method.
• Further, construction doesn’t happen in a warehouse or on an assembly line — it occurs on various job sites.
• The preliminary stage commences at the beginning of a project and lasts until the acquisition or construction of the specific long-lived asset is considered probable, as defined in ASC 450, Contingencies.
• For example, if work already completed is of sub-standard quality, these reports would not reveal such a problem.
• Get the low-down on construction accounting, including more information on chart of accounts, common construction accounting reports, and more with Levelset’s Ultimate Guide to Construction Accounting.