Unlike many other industries, accounting for the construction companies does not just include a regular series of debits and credits. Instead, a construction accountant uses a system that is designed to match income and expenses to the varying length and size of construction contracts.
Like a contractor accountant, a construction accountant is trained to serve its industry’s specific accounting requirements. This type of accounting includes mostly the categories of: contract revenue, contract costs, trade receivables, gross amount due to/from customers, advances from customers and retention money.
6 Steps for a Construction Accountant
To learn if construction accounting is right for you, compare these basics with your business’ needs.
- Amount of revenue initially agreed in the contract
- Incentive Payments considered likely to accrue to the contractor
- Approved variations in contract revenue
- Amount of claims that are considered likely to be accepted by the customer
- Revenue of construction contracts is recognized according to the stage of contract completion that can be reliably measured
- Direct or specific costs of the construction contract, including direct material, direct labor, insurance cost incurred and depreciation
- Indirect costs may be allocated to individual contracts on a reasonable basis, including allocation of the cost based on an example number of hours spent on various contracts, insurance cost allocation of machinery used on multiple sites, construction overheads and allocation of salary of staff employed on multiple contracts, such as project supervisors
- Any other costs specifically allowable under the contract
Trade receivables are defined as the difference between the amount the customer is billed in progress billings, and the amount of progress payments received.
In tax planning and preparation, a construction accountant follows this formula: Trade Receivables equals Amount Billed to Customer as progress billings minus Progress Payments Received.
Gross amount due to/from customers
Gross amount due from customer is the amount of revenue earned on a contract that has not been billed. It also includes the amount of contract costs to date that have not been charged to the income statement. It represents the contract work in progress.
Gross amount due to customer shows the amount of revenue earned on a contract in excess of the amount billed to the customer. This also includes the amount of contract costs incurred above the amount charged to the income statement.
Advances from customers
This section accounts for advances from customers for contract work that has not been performed yet. The advances must be recognized as a liability until the work is performed.
Sometimes in construction, customers may retain a specified amount that is due the contractor after the project’s completion. Retention money may be recognized as a receivable in the financial statements of the contractor until it is returned to them.