Construction Accounting

and Financial Management

Chapter 2
Construction Accounting Systems

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Purposes of the Accounting System

 Process cash receipts and disbursements

 Prepare financial statements
 Pay Income and employment tax
 Provide data for financial management

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Cost Reporting Versus Cost Control
 Cost Reporting:
 Provides data after the opportunity has passed for
management to respond to and correct the
problems
 Shows where the company has been
 Reactive approach
 Cost Control:
 Provides data in time for management to analyze
the data and make corrections in a timely manner
 Proactive approach
Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Components of a Cost Control
System
 Strong job cost and equipment tracking
 Costs must be current & up to date
 Uses “management by exception” Management by
Exception: a policy by which management devotes
its time to investigating only those situations in
which actual results differ significantly from planned
results. Else, higher management is to mainly
target & address “strategic” plans & decisions!
 Follows established procedures
 Data must readily be available
Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Components of an Accounting
System
 General Ledger:
 Chart of accounts (see Figure 2-1)
 Balance sheet and income statement

 Job Cost Ledger:

 Costs by project

 Equipment Ledger:
 Costs by piece of equipment or vehicle

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Method of Accounting

 Cash
 Accrual
 Percentage of completion
 Completed contract

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Cash

 Revenue is recognized when payment is

received
 Expenses are recognized when bills are paid
 Easiest to use
 Little use for financial management because
data is not up to date

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Accrual

 Revenue is recognized when the company

has the right to receive payment
 Retention is not a revenue until the job is
complete

 Expenses are recognized when the company

is obligated to pay bills
 May pay income taxes on imaginary profits

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Percentage of Completion

 Revenue is recognized throughout the project

 Retention is recognized throughout the project

 Expenses are recognized throughout the

project
 Estimated profits are equally distributed
throughout the project
 Based upon expected revenues and expenses

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Completed Contract

 Revenue is recognized at completion of the

project
 Expenses are recognized at completion of
the project
 Revenues and expenses are known
 Useless for financial management
 May create large swings in income
Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Balance Sheet

 Assets = Liabilities + Owner’s Equity

 “Snapshot” of a company’s assets, liabilities,
and owner’s equity

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Current Assets
 Cash
 Accounts Receivable-Trade
 Accounts Receivable-Retention
 Inventory
 Costs and Profits in Excess of Billings (Underbillings)
 Notes Receivable
 Due from Construction Loans
 Prepaid Expenses
 Other Current Assets
 Total Current Assets (sum of above)

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Fixed and Other Assets
 Land
 Buildings
 Construction Equipment
 Trucks and Autos
 Office Equipment
 Total Fixed Assets (sum of above)

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Fixed and Other Assets
 Less Accumulated Depreciation (Contra Account)
 Net Fixed Assets
(Total Fixed assets – Les Accumulated Depreciation)

 Capital Leases
 Other Assets
 Total Assets (Total Current Assets + Net Fixed Assets +
Other Assets)

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Liabilities
 Current Liabilities
 Accounts Payable-Trade
 Accounts Payable-Retention
 Billings in Excess of Costs and Profits (overbillings)
 Notes Payable
 Accrued Payables (including taxes and vacation)
 Capital Lease Payable
 Warranty Reserves
 Other Current Liabilities
 Total Current Liabilities (sum of above)

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Liabilities
 Long-term Liabilities
 Total Liabilities (Total Current Liabilities + Long-term Liabilities)

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Owner’s Equity (Corporation)

 Capital Stock
 Retained Earnings
 Current Period Net Income
 Total Equity

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Income Statement

 Spans a period of time

 Represents the transactions that occur
between two balance sheets

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Income Statement
 Revenue
 Construction Costs
 Equipment Costs
 Gross Profit (Revenue – Const. Costs – Equip. Costs)
 Overhead
 Net Profit From Operations (Gross Profit – Overhead)
 Other Income and Expense
 Profit Before Tax (Net Profit – Other Income and Expense)
 Income Tax
 Profit After Tax (Profit Before Tax – Income Tax)

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Construction Costs
 Materials
 Labor
 Passes through payroll system and is charge to a
job
 Subcontract
 Always includes labor component
 Equipment
 Other
Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Equipment Costs
 Rent and Lease Payments
 Depreciation
 Repairs and Maintenance
 Fuel and Lubrication
 Taxes, Licenses, and Insurance
 Equipment Costs Charged to Jobs (Contra)
 Equipment Costs Charged to Employees (Contra)
 Total Equipment Costs

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Relationships

 Balance Sheet
 Assets = Liabilities + Equity

 Income Statement
 Revenue = Expenses + Profit

 Balance Sheet and Income Statement

 Change in Equity = Profit

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Job Cost Ledger
 Provides breakdown of construction costs on
income statement
 May provide a breakdown of revenues on the
income statement
 Costs are broken down by:
 Job
 Phase (optional)
 Cost code
 Cost type
Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Job Cost Ledger

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Job Cost Code Structure

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Relationships

 Income Statement and Job Cost Ledger

 Revenue = Revenues
 Construction Costs = Construction Costs
 Excludes Committed Costs not Recognized
 Materials = Materials
 Labor = Labor
 Subcontract = Subcontract
 Equipment = Equipment
 Other = Other

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Equipment Ledger

 Provides breakdown of equipment costs on

income statement by piece of equipment
 May provide additional breakdown

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Equipment Ledger

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved
 Relationships

 Income statement and Equipment Ledger

 Charge Costs = Cost Allocated
 Costs = Costs
 Rent and Lease Payments = Rent and Lease Payments
 Depreciation = Depreciation
 Repairs and Maintenance = Repairs and Maintenance
 Fuel and Lubrication = Fuel and Lubrication
 Taxes, Licenses, and Insurance =
Taxes, Licenses, and Insurance

Construction Accounting & Financial Management, 3/e © 2013 by Pearson Higher Education, Inc
Steven Peterson Upper Saddle River, New Jersey 07458 • All Rights Reserved