Software suites like QuickBooks give you the ability to set up your Chart of Accounts according to your specific business needs. By fine-tuning your chart in QuickBooks, you can also eliminate options that wouldn’t apply to a construction firm, streamlining the view of your business’s financial framework. Each of these will have at least one account in the ledger, depending on the structure of the company and how detailed the records are. Each transaction affects at least two ledger accounts and the activity for a transaction has to be balanced.

• Explore the definition of a chart of accounts for construction company and find out how to create a chart of accounts with our comprehensive guide.
• Job costing helps stay on top of the numerous variables of running a project-centered, decentralized business.
• A chart of accounts should keep your business accounting error-free and straightforward.
• In comparison to other industries, like retail or manufacturing, construction contracting has several distinct traits from an accounting perspective.

As expenses and costs come in from jobs, they get allocated to the correct area of COA. Construction-specific accounts include many items that are common to contractors, such as business and building permits, outside labor, mobile restroom rental, or catering services for laborers. As your business grows, so will your need for accurate, fast, and legible reporting. Your chart of accounts helps you understand the past and look toward the future. A chart of accounts should keep your business accounting error-free and straightforward.

Expenses

Assets include all cash, accounts receivable, equipment, and materials purchased or leased for a project. On a high level, an asset is any resource with economic value owned or controlled by you. As a result, contractors in multiple jurisdictions have to watch out for double taxation. Chiefly, this can be a problem where an employee resides in one state and works in another. When states have a reciprocity relationship, however, the worker’s state of residence may issue credit for taxes paid on income earned out of state.

This way profits can be assured because there’s a constant measurement of the actual on site costing compared to the contractual amounts. The needs of construction work mean different kinds of accounting processes need to be used. This is all on top of requirements for processing payments as part of the Construction Industry Scheme (CIS), the rules for which have recently been adjusted.

The general ledger is defined as a record of the financial transactions of a company. It provides a way to categorize transactions so that similar ones can then be summarized in the financial statements. The following steps can help you get your construction accounting started on the right foot and help you stay on top of your bookkeeping and financial management.

Hire an Accountant (Optional)

Luckily, modern accounting software makes life easier for accountants by automatically labeling and categorizing the entries, which makes them easier to track and locate. A chart of accounts allows you to track every transaction by category and subcategory. This way, you can see exactly where your business is making and spending money. Everything from a new bank loan to an invoice from a supplier is recorded in an appropriate category, making it easy for you to locate any bit of financial data.

Often that requires specialized software to track and create those billings. Construction companies use a chart of accounts to organize financial transactions in order to build financial statements. When a transaction is entered, it becomes recorded in a double-entry system. Financial statements summarize these transaction amounts for a given time period. Since construction accounting is project-centric, you’ll need a way to track, categorize, and report transactions for each job.

Construction Accounting Part 1: What is the Right Chart of Accounts Structure

Because of the construction industry’s unique accounting requirements, construction accounting is a specialized skill. This automation helps contractors easily keep both systems up-to-date and accurate. Since QuickBooks Online helps create financial reports, contractors can use the integrated accounts from Knowify to help create reliable and accurate financial reports for their business. The completed contract method is best used for small jobs that are relatively short-term or when a project brings an inherent risk in completion. Under the completed contract method, you’ll recognize revenue after the contract’s completion (or substantial completion). All project or job costs will also fall under expenses such as labor, material, equipment, and permits.

Finally, contractors can face numerous payroll reporting requirements, even if they don’t have to file certified payroll. These can include union reports, workers’ compensation, new hire reporting and equal employment opportunity (EEO) minority compliance. Contractors need to have a keen awareness of these requirements for each jurisdiction they bid and work in, from the federal down to the local level. Indirect expenses are expenses that provide support to the construction of projects but aren’t specific to any one entity.

Liabilities

While bookkeeping tools like QuickBooks will sort this out for you, it’s important to know how everything fits together. With that said, the chart of accounts then lists all accounts so you can record and organize all activity happening 5 skills every entrepreneur should have in your general ledger. This forms the basis for creating general ledger accounts before posting transactions. The percentage of completion method (PCM) allows a contractor to recognize revenue as they earn it over time.

If you’ve recently applied for and had your construction business loan denied, you may be wondering what to do next. Ideal debt-to-equity for most companies is between 1 and 2, and companies with a debt-to-equity ratio higher than 2 may be unable to pay off its debts. On the other hand, a company with a debt-to-equity ratio of less than 1 may not be using enough debt financing to take on new projects and grow. The current ratio evaluates how readily a company can use its current assets to cover its current liabilities. To calculate the current ratio, simply divide current assets by current liabilities. Importantly, the income sheet’s view of profit must match the change in equity reflected on the balance sheet.

Download a QuickBooks Chart of Accounts Template for Contractors

Large construction companies can have a range of executives, each one heading their respective division. Actual titles vary, and may be called vice presidents or chief officers, like VP of Operations or Chief Financial Officer (CFO). As you move down the organizational chart, the roles move from strategy and management to task-specific jobs. In lower levels of responsibility, there can be dozens — if not hundreds — of employees, each working on their own portion of the larger work. Now that your COA is set up, it’s important to keep it organized as you continue to add or adjust accounts. For instance, if you rent, the money moves from your cash account to the rent expense account.

How Jonas Construction Software Can Help You Build the Perfect Chart of Accounts

The practice of retainage, aka retention, has a tremendous impact on the construction industry. Liability accounts include warranty reserves to account for any future warranty claims. While every chart is different, there are some basic categories that most companies will want to include. Contractors have more complex income streams and generally are recognizing their income based on completion of work. Make sure that each description provides enough information so that a new person on a job could dive in and easily make themselves familiar with your system.