Technology improvements have brought accounting software to the door of nearly every kind of business, at a very reasonable cost. Unfortunately, software is not capable of doing all the necessary entries to keep an accounting system complete and accurate. This is especially true in the construction industry where accounting is not just a series of debits and credits, but rather a system designed to match income and expenses to the varying length and size of contracts.
Construction contracts vary in length and size making it difficult to match expenses to their respective source of revenue. Because of the nature of transactions incurred by construction businesses, job costing is a standard practice in all methods of construction business accounting. Job costing requires the allocation of all direct and assignable indirect expenses and revenues to each respective job or contract. Job costing simplifies tax preparation and provides profitability by contract.
Cash basis is the simplest accounting method, recording revenue when received and expenses when paid. But there are a few cautions when dealing with this method. Revenue is recognized, or recorded, when constructively received, you must allocate expenses evenly over the entire period of benefit, when they apply to a multi-year period. Construction businesses cannot use cash basis accounting on their tax returns if job materials constitute more than 15 percent of the total cost to the customer.
Percentage of Completion
The matching principle requires revenues and expenses to be matched in the period they are incurred. Matching revenues and expenses for construction businesses can be challenging due to the varying length of contracts. Consequently, contractors use the percentage of completion method to recognize gross profits from construction jobs in each period incurred rather than after completion.
Construction contracts estimated to last two years or less, commonly use the completed contract method of accounting. Under this method, contractors capitalize all job expenses. Capitalization of expenses means nothing more than moving the expenses to the balance sheet as an asset. Revenue received moves to the balance sheet as well and becomes a liability. Upon completion of the contract, recognition of revenue and expenses occurs by moving them from the balance sheet to the appropriate income and expense accounts.
If you are into the building business, then you are familiar with the challenges and competition in this particular industry. Aside from the physical demands that are involved in this line of work, careful planning and management skills are needed to oversee sub-contractor obligations as well as cash flow.
Nobel Thomas understands the long hours involved in this business, the travel requirements as well as the struggles that come with the administration and bookkeeping functions. Among the most significant financial obligations of a self-employed builder include BAS, GST and tax payments, among others. In our experience, many builders end up paying an excessive amount of tax as well as exposing their companies to fines due to lack of understanding on how the industry works.
Nobel Thomas possesses in-depth understanding, expertise and experience in handling accounting functions for the building industry. With our proficiency in business advisory, accounting and financial management, we can help you make the difference between merely surviving from month to month into transforming your business into a thriving company.
Apart from the usual tax compliance obligations, we can also provide assistance in managing cash flow, choosing the right software for preparing quotes, managing staff and issuing invoices.