Construction accounting
Encyclopedia
Construction accounting is a form of project accounting
applied to construction projects. See also production accounting. Construction accounting is a vitally necessary form of accounting, especially when multiple contracts come into play. The construction field uses many terms not used in other forms of accounting, such as draw
and progress billing. Construction accounting may also need to account for vehicles and equipment, which may or may not be owned by the company as a fixed asset
. Construction accounting requires invoicing and vendor payment
, more or less as to the amount of business
done.
In the United States, the authoritative literature on Construction accounting is AICPA Statement of Position SOP 81-1 (SOP 81-1).
In most cases, revenue is recognized using the Percentage of Completion Method. Under this method, revenue is recognized using an estimate for the overall anticipated profit for a particular contract multiplied by the estimated percent complete of that contract. This involves the inherent risk of relying upon estimates.
Under SOP 81-1, revenue is also allowed to be computed using the Completed Contract Method. Under this method, contract revenues and costs are not recognized until the contract is substantially complete. However, this method is not allowable if the results are significantly different than results using the Percentage of Completion Method. The Completed Contract Method is allowed in circumstances in which reasonable estimates cannot be determined. However, these types of circumstances can be construed as a lack of internal control.
Project accounting
Project accounting is the practice of creating financial reports specifically designed to track the financial progress of projects, which can then be used by managers to aid project management....
applied to construction projects. See also production accounting. Construction accounting is a vitally necessary form of accounting, especially when multiple contracts come into play. The construction field uses many terms not used in other forms of accounting, such as draw
Draw
Draw, draws or drawn may refer to:* The act of drawing, or making an image with a writing utensil* A part of many card games* A part of a lottery* Wire drawing...
and progress billing. Construction accounting may also need to account for vehicles and equipment, which may or may not be owned by the company as a fixed asset
Fixed asset
Fixed assets, also known as a non-current asset or as property, plant, and equipment , is a term used in accounting for assets and property which cannot easily be converted into cash. This can be compared with current assets such as cash or bank accounts, which are described as liquid assets...
. Construction accounting requires invoicing and vendor payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
, more or less as to the amount of business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
done.
In the United States, the authoritative literature on Construction accounting is AICPA Statement of Position SOP 81-1 (SOP 81-1).
Construction Costs
Construction accounting involves charging construction costs to the applicable contract. Costs fall into three categories. Direct costs are labor, material, and subcontracting costs. Indirect costs include indirect labor, supervision, tools, equipment costs, supplies, insurance, and support costs. Selling, general and administrative costs, are generally excluded from contract costs.Revenue Recognition
Construction accounting requires unique revenue recognition rules for contracts in progress.In most cases, revenue is recognized using the Percentage of Completion Method. Under this method, revenue is recognized using an estimate for the overall anticipated profit for a particular contract multiplied by the estimated percent complete of that contract. This involves the inherent risk of relying upon estimates.
Under SOP 81-1, revenue is also allowed to be computed using the Completed Contract Method. Under this method, contract revenues and costs are not recognized until the contract is substantially complete. However, this method is not allowable if the results are significantly different than results using the Percentage of Completion Method. The Completed Contract Method is allowed in circumstances in which reasonable estimates cannot be determined. However, these types of circumstances can be construed as a lack of internal control.