Construction business owners have a lot of responsibilities on a building site that they have little or no time to take a particular interest in construction accounting.
It is vital to take control of construction business finances to manage a healthy business and sustain growth in the long term. This industry has unique and precise accounting requirements that go beyond the basic accounting principles of other companies.
In this article, Experlu will learn how to do accounting for a construction business.
Accounting for construction business
Separate business account
Every business owner must have a separate business bank account that helps them keep finances organized. Construction accounting, unlike standard accounting, involves monitoring the variable operational cost and project cost. If you don't separate business and personal finance from the initial stage of your business, it can be challenging during tax preparation and handling legal issues.
A construction contractor can work on multiple projects at a time. Accurately identifying the expense of each job, controlling costs and measuring the profitability is challenging.
In the job costing method, the contractor needs to allocate expenses and revenue to each job that helps during tax preparation and provides an accurate accounting of profitability for each project.
We can calculate the job cost by determining the labor cost, material charges and overheads for a specific project.
Total job cost = direct materials + direct labor + applied overhead.
Record daily transactions
It is vital to record day to day transactions for construction businesses. You can use a spreadsheet or accounting software to record the regular transaction. Aim to implement the software so that bookkeeping becomes simpler.
Contract revenue recognition
Revenue recognition for contractors is challenging as maximum projects have a long-term nature.
Generally, companies use two accounting methods: cash basis or accrual basis.
In cash basis accounting, you can record revenue when you receive a payment and expenses when you pay them. However, in accrual basis accounting, you record income when earned and expenditures when incurred, regardless of when the money truly changes hand.
Though cash basis accounting may look simple, construction businesses can use accrual basis accounting that gives the actual image of the company finances.
Percentage of completion method
Find accountant in UK to help you understand how to calculate the percentage of completion method. This method allows contractors to understand their revenue generation from each project over time. You can figure it using several ways:
The cost-to-cost method:
The percentage of total contract revenue = Total cost incurred till date/total estimated contract cost.
Efforts expended method: You can compare the effort given to date with the estimated total effort.
Units-of-delivery method: You compare the revenue and expense for the number of units delivered to the customer to date with the total unit specified in the contract.
Completed contract method
Under this accounting method, an owner only understands all their revenue and profits related to a project when they complete it.
Beware of the cash flow trap.
Accountants for contractors need to keep track of business cash flow. For a construction project, request a large purchase of materials before receiving customer payments. If your client goes bankrupt during the project, you will lose a considerable percentage of money and probably go bankrupt too.
Therefore, it is essential to invoice your client regularly and get payments for significant materials and labor charges. If you can manage your cash flow efficiently, you don't need to worry about bad debts.
Determine the best tax strategy
Several factors influence contractors' income tax liability, including their business structure, choice of revenue recognition model, and type of projects. Ask help from professionals to help you understand the country's changing rules and regulations and prepare tax return files.
Invest in accounting software
Using an integrated Software System for your construction business allows timely measurement against key performance indicators and generates accurate financial reports. Modern cloud-based accounting tools help you manage your books from anywhere using a smartphone or tablet. This software allows you to keep daily records of business transactions and reduces your financial workload.
Construction accounting can be challenging to business owners, but it will never be a headache with the proper process and professional help. You can also implement advanced accounting software or use cloud-based tools to access your books and update them from the construction site without hassles.
Identify how construction accounting is different from the traditional accounting process, what are the new legislation for the construction industry, and for what tax reliefs you are eligible. All this information will also help you improve your business's accounting process.