Which method of accounting is best for a construction company?
If you’re in the construction industry, then you know that there are a lot of different methods of accounting. But which one is best for your company? There are a number of different accounting methods that construction companies can use, and the best method for a particular company will depend on a number of factors.
This article will take a closer look at three of the most popular methods – accrual, job order, and cash – and help you decide which one is right for you. It will also explain outsourced accounting for construction companies.
What do you mean by outsourcing accounting for construction companies?
There are many different ways to outsource accounting for construction companies. The most common way is to hire an accounting firm to do the work for you. This can be a great way to save time and money, but it is important to make sure that you find a reputable firm that you can trust.
Another option is to use an online accounting service. This can be a great option if you are comfortable with technology and want to save money on accounting fees. However, it is important to make sure that you choose a reputable service that has experience with construction companies.
Finally, you could also choose to do your own accounting. This can be a great option if you have the time and knowledge to do so. However, it is important to make sure that you keep accurate records and stay up-to-date on the latest tax laws.
No matter which option you choose, it is important to make sure that you understand the process and are comfortable with it. As we previously said, outsourcing accounting for construction companies can be a great way to save time and money, but it is important to find a reputable firm that you can trust. A firm like Accurox, who are specialist accountants for construction companies.
What method of accounting is best for a construction company?
There is no one-size-fits-all answer to this question, as the best method of accounting for a construction company will vary depending on the specific needs and circumstances of the business. However, some common accounting methods used by construction companies include cash basis accounting, accrual basis accounting, and job cost accounting. Here, we will explain each of them in detail so you can make an informed decision on which one to choose for your business.
Cash basis accounting
When we say cash basis accounting, we mean that transactions are only recognised when cash changes hands. This is the most basic form of accounting and is used primarily by individuals and very small businesses.
In addition, many businesses use the cash basis for tax reporting purposes. For example, if you are an electrician and you’re paid $100 for a service, you would recognise that as income when you receive the $100. If you then spend $50 on office supplies, you would recognise that as an expense when you pay for it.
This accounting method is the simplest and most straightforward, but it can create problems when trying to track expenses since many businesses do not purchase everything in cash. This is the reason why you need to outsource your accounting services to an expert accountant for construction. This gives you financial expertise at your fingertips without the price tag of hiring a full-time director in-house.
Accrual basis accounting
With accrual basis accounting, transactions are recognised when they occur, regardless of when the cash is actually paid or received. This means that revenue is recognised when it is earned, not when it is collected. Similarly, expenses are recognised when they are incurred, not when they are paid.
The accrual basis of accounting provides a more accurate picture of a company’s financial position compared to cash basis accounting. However, it is more complex and requires more record-keeping. This means that it can be more expensive to maintain financial records using accrual basis accounting. It also means that businesses need to have a good understanding of accrual accounting in order to prepare accurate financial statements.
The accrual basis is generally used by businesses because it provides financial accuracy in real time. Plus, it is also required by Generally Accepted Accounting Principles (GAAP).
Modified accrual basis accounting
Modified accrual basis accounting is a hybrid of cash basis and accrual basis accounting. Under this method, transactions are recognised when cash changes hands, but revenue is also recognised when it is earned, regardless of when the cash is actually collected.
This method is often used by government agencies because it provides a more accurate picture of both the financial position and the results of operations than does cash basis accounting. However, modified accrual basis accounting is more complex than cash basis accounting and can be more expensive to maintain.
5 Construction Accounting Methods
There are five main methods of accounting used in the construction industry. They are:
- Job order costing is the most common accounting method used in construction. In this method, costs are assigned to specific projects or jobs. This allows managers to see how much each job costs and track project costs.
- Activity-based costing is a newer accounting method that assigns costs to specific activities. This helps managers see which activities are costing the most and where there may be opportunities to save money.
- Production order costing is commonly used in manufacturing companies. In this method, costs are assigned to products or batches of products. This allows managers to track the cost of each product and compare it to the selling price.
- Functional depreciation is an accounting method that assigns costs to specific functions or departments. This helps managers see which functions or departments cost the most and where there may be opportunities to save money.
- The completed contract method is an accounting method that recognises revenue only when a project is completed. This method is used mostly by large construction companies with long-term projects.
Ultimately, the best construction accounting method for your company depends on your specific needs and goals.
How to Choose the Right Construction Accounting Method
There are two methods that companies can use to account for their construction costs. The completed contract method and the percentage of completion method. There are advantages and disadvantages to both, so it is important to understand which one is right for your company.
The completed contract method recognises revenue only when a project is complete. This means that all expenses related to the project are not recognised until the project is complete. This can lead to large swings in income, as all of the revenue from a project may be recognised in one month, while all of the expenses may be recognised in another month.
The percentage of completion method recognises revenue as the project progresses. This means that expenses are also recognised as the project progresses. This can lead to more accurate financial statements, as expenses are matched with revenue. However, this method can be more complex to account for, as it requires estimates of the percentage of completion for each project.
The main consideration when choosing a construction accounting method is what will work best for your company.
- If you want to track your profits closely, the job order costing system may be the best option.
- If you’re looking for a simpler way to track costs, the percentage of completion method may be a better choice.
- The completed contract method may be a better choice if you have large projects that have been completed over several years.
- If you have smaller projects that are completed in a shorter time frame, the percentage of completion method may be a better choice.
Outsourced Accounting And Bookkeeping For Construction Companies
If you are a construction company owner and have been thinking about outsourcing your accounting and bookkeeping, there are a few things you should know. First, it is important to understand that there are many benefits to outsourcing these services. Second, you need to make sure that you find a reputable company that has experience working with construction companies.
Here are some tips to help you find the right provider for your needs:
It is important to find an accounting and bookkeeping provider that has experience working with construction companies. This way, you can be assured that they understand the unique needs of your business and can provide the services you need.
Make sure that the company you choose offers the services you need. For example, if you only need bookkeeping services, then make sure that they specialise in this. On the other hand, if you need both accounting and bookkeeping services, make sure that the company offers both.
Choose a company that is flexible in terms of the services they offer. This way, you can be sure that they will be able to adapt to your changing needs as your business grows.
Make sure that you compare prices before making a decision. There are many companies out there that charge different rates for their services, so it is important to find one that charges a fair price.
5. Customer service
Finally, make sure that the company you choose has excellent customer service. You should feel comfortable communicating with them and should be able to get answers to your questions quickly.
Benefits of using Accounting Software for construction companies
If you’re running a construction company, you might be wondering which accounting method is best for your business. There are many different accounting methods out there, but using accounting software can offer some big benefits for construction companies. Some of these are:
It can save the company time and money
Using accounting software can save the company both time and money. It can automate many of the tasks of an accountant, including invoicing, tracking expenses, and preparing financial statements. This can free up the accountant’s time to focus on more strategic tasks. In addition, by automating these tasks, the software can help to reduce errors and improve accuracy. This can save the company money that would otherwise be spent on correcting mistakes.
It can improve decision-making
By providing accurate and up-to-date financial information, the software can help managers make informed decisions about where to invest resources. In addition, the software can provide insights into trends and patterns that may not be immediately apparent. This can help managers identify problems early and take steps to avoid them.
It can promote growth
By providing accurate financial information, the software can help businesses track their progress and identify areas where they need to improve. In addition, by automating tasks, the software can help businesses save time and money. This can free up resources that can be reinvested in other areas of the business, such as marketing or research and development. As a result, accounting software can help businesses grow and become more profitable.
Improve your cash flow
Another benefit of outsourcing accounting and bookkeeping for construction companies is that it can help improve your cash flow. When you outsource these services, you will have access to expert advice on how to better manage your finances, which can help you save money and improve your bottom line. In addition, when you outsource these services, you will be able to get more accurate financial statements, meaning you can make better decisions about where to invest
Make Construction Accounting Easier With Accounting Software
You know that construction accounting can be a real headache. There are so many different aspects to keep track of, from materials and labour costs to job site expenses. It’s no wonder that so many construction companies choose to use accounting software to make things easier.
There are a few different types of accounting software on the market, but which one is right for your construction company? Here’s a look at some of the most popular options:
QuickBooks is one of the most popular accounting software programs on the market. It’s designed specifically for small businesses, and it offers a wide range of features that can be customised to fit your needs. If you’re looking for an easy-to-use program that can handle all of your construction accounting needs, QuickBooks is a great option.
2. Sage 50
Sage 50 is another popular accounting software program that’s often used by small businesses. It offers similar features to QuickBooks, but it also has some advanced features that may be beneficial for your construction company. If you need more than just basic accounting features, Sage 50 might be the right choice for you.
Xero is cloud-based accounting software that offers a wide range of features. It’s designed for small businesses, and it’s a great option if you need more than just basic accounting features. Xero also offers a mobile app, so you can access your account from anywhere.
FreshBooks is another cloud-based accounting software that’s ideal for small businesses. It offers many of the same features as Xero, but it also has some unique features that may be beneficial for your construction company. If you need an easy-to-use program that can handle all of your construction accounting needs, FreshBooks is a great option.
When you’re choosing accounting software for your construction company, it’s important to find a program that offers the features you need at a price you can afford. QuickBooks, Sage 50, and Microsoft Dynamics GP are all great options that can help you make construction accounting easier.
Need more help?
We hope that this article has given you some food for thought and helped you to better understand the different options available to you. Ultimately, it is important to choose an accounting method that will allow you to accurately track your income and expenses so that you can make informed decisions about your business.
There is no one-size-fits-all answer to this question, as the best method of accounting for a construction company will depend on the specific needs and goals of that business. If you need help, however, Accurox provides a full range of Outsourced Finance Services, including part-time financial directors. To discuss your business requirements, please do get in touch.
|What makes accounting for building projects unique?
There are many key distinctions between construction accounting and other types of accounting.
* There’s an emphasis on project-based budgeting and the necessity to monitor numerous tasks at once.
* Projects might take months or even years, so contractors need to manage unique approaches to revenue recognition and tax reporting.
* Large building projects frequently involve retainage and modification orders, both of which must be accounted for in construction accounting.
What is the process of construction accounting?
Accurately allocating expenditures and managing revenues across a variety of construction projects is a common task for a construction accountant. Each building job is viewed as a standalone opportunity for quick financial gain. Variables such as labour force availability, material costs, and local zoning can significantly impact profit margins, even for seemingly identical projects. Depending on their circumstances, contractors must choose between cash-basis accounting and accrual-basis accounting and between the percentage-of-completion technique and the full contract approach for major projects.
When it comes to construction budgeting and bookkeeping, what methods are generally accepted?
Contractors may increase their earnings by adhering to industry standards, but this is easier said than done due to the complexity of construction accounting. Accurate job costing is essential for contractors to correctly allocate all expenses to individual projects and assess the profitability of such projects.
One of the main benefits of cash-basis accounting for independent contractors is simplifying financial management. Businesses with a larger workforce need to weigh the pros and cons of using either the percentage of completion or the completed contract technique when accounting for large-scale projects. Accounting software may streamline and computerise a number of labour-intensive processes in construction bookkeeping and tax filing.
Please explain the best methods for construction accounting.
A construction firm’s business model should inform the company’s accounting policies and procedures. While smaller businesses may use the simpler cash-basis accounting, bigger businesses will need to employ accrual-based accounting to support either the percentage of completion or the completed contract methods of revenue recognition. Most contractors cannot be successful in the long term without effective work costing and change order management.