A Comprehensive Guide to Accounting Methods for Construction Companies

Accounting plays a crucial role in the success of construction companies. It helps executives allocate financial resources efficiently, make informed decisions, and ensure compliance with accounting standards. In this comprehensive guide, we will explore various accounting methods used in the construction industry and how to choose the right method for your business.

Construction Accounting Basics

Before diving into different accounting methods, let's understand the basics of construction accounting. Construction accounting involves tracking and recording financial transactions specific to construction projects. It focuses on job costing, revenue recognition, and managing costs throughout the construction lifecycle.

Job Costing

Job costing is a fundamental aspect of construction accounting. It involves tracking and allocating costs to specific construction projects. This helps companies determine the profitability of each project and make data-driven decisions to control costs.

Revenue Recognition

Construction projects often span over an extended period, making revenue recognition a critical aspect of construction accounting. The percentage of completion method and the completed contract method are commonly used for revenue recognition in the construction industry. These methods ensure that revenue is recognized as construction progresses or when the project is completed.

Commonly Used Construction Accounting Methods

Let's explore some of the commonly used accounting methods in the construction industry:

Cash Basis Accounting

The cash basis accounting method recognizes revenue and expenses when cash is received or paid. It provides a simple and straightforward approach to accounting, but it may not accurately reflect the financial health of a construction company with long-term projects.

Accrual Basis Accounting

The accrual basis accounting method recognizes revenue and expenses when they are earned or incurred, regardless of when cash is received or paid. It provides a more accurate picture of a construction company's financial performance, especially for long-term projects.

Percentage of Completion Method (PCM)

The percentage of completion method recognizes revenue and expenses based on the percentage of work completed on a construction project. It allows construction companies to recognize revenue as they make progress on a project, providing a more accurate representation of financial performance.

Completed Contract Method (CCM)

The completed contract method recognizes revenue and expenses when a construction project is completed. It defers revenue recognition until the project's completion, which may result in significant fluctuations in financial statements.

Other Accounting Methods

There are also other accounting methods used in construction accounting, such as the ASC 606 standards method, the contract-retainage method, the fixed-price method, and the time-and-material method. Each method has its own advantages and considerations, and the choice depends on the specific needs and characteristics of a construction business.

Choosing the Right Accounting Method

Choosing the right accounting method for your construction business is crucial for accurate financial reporting and decision-making. Consider the following factors when selecting an accounting method:

• Size and complexity of projects
• Longevity of projects
• Industry standards and regulations
• Financial goals and reporting requirements

It is recommended to consult with a qualified accountant or financial advisor to determine the most suitable accounting method for your construction business.

Conclusion

Accounting methods play a vital role in the financial management of construction companies. Understanding the basics and various methods available can help construction executives make informed decisions, control costs, and ensure accurate financial reporting. By choosing the right accounting method, construction businesses can streamline their financial processes and achieve greater success.