Some Accounting Practices To Benefit The Construction Industry
Posted on 27th June 2022
Construction accounting is completely different from business accounting, which mainly deals with accounts receivable, standard accounts payable and payroll transactions. Construction accounting deals with job costing, progress billings, customer deposits, change orders, and retention. It is more challenging than business accounting as the nature of the business is more complicated.
The accounting methods you have to use here are different from those in other sectors. Often, builders have to work on numerous projects simultaneously, distributed across various sites. They have to manage revenue, cost and profitability. They can easily deal with the complexity of revenue management by hiring accountants who cater to construction companies.
Few Construction Accounting Practices That Maximise Profitability
Most builders have to work on numerous projects simultaneously. They can measure profitability and control cost if they accurately attribute expenses to each project. Efficient job costing is an integral part of construction accounting as it ensures that all expenses (direct and indirect) are properly allocated to the right job. It becomes easier for the company to assess whether its financials are on track. Job costing also involves recording expenses while working on a project and submitting and booking those expenses every day.
Two common accounting methods are accrual basis and cash basis. Small construction firms prefer the cash-basis accounting system as it is more straightforward. Under this system, business accountants record the revenue they receive and the expenses they are paying the vendors. You can simplify daily financial management by deploying cash-basis accounting as it requires less financial expertise. Construction companies, however, can’t use cash-basis accounting for tax purposes if their average revenue is more than $25 million. Such businesses have to use accrual-basis accounting, which is more complicated.
Percentage of Completion Method
PCM is a widely accepted accounting approach that allows contractors to distinguish the revenue they earn from each project. It is an accurate method of recording revenues and expenses. Since calculating the expenses and revenues of long-term contracts is a complicated method, you can consider hiring accountants who specialise in working for construction companies. Most of them have years of industry presence and know how to generate accurate estimates through the PCM. The Percentage of Completion Method of accounting ensures that contractors get paid for their work on time.
While you are now aware of the best accounting practices for the construction industry, it’s always advisable to hire an experienced accountant instead of trying to do it yourself.
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