The unearned portion (such as a deposit received before work is started) is tracked in an asset or liability account until it’s earned. The earned portion (the portion that’s been completed on the job) is tracked as income or expense. The earned and unearned portions of a job are tracked separately. The Percentage of Completion method recognizes revenue only on the portion of the job that’s complete. This is the best method for remodeling companies and most construction companies. However, it isn’t the best solution for contractors, because it still doesn’t clearly account for the work that’s been done. Typically this is a slightly better method than the cash basis because costs and expenses that have been incurred are included in the financials reports. Expenses are all bills paid as well as bills that have been received but haven’t yet been paid. The accrual method of accounting considers income to be all cash received as well as all invoices written. If you accept a deposit for a job before the job starts, it will be considered income and if it’s the end of a financial year, you’ll be taxed on that money as profit. ![]() Job and overhead expenses are considered a deduction against income on the date they are paid. The cash basis method is simple in that it tracks money into your checking account as income on the date it’s received. This is the most basic method of accounting but it can also be the most inaccurate method for contractors. Karen is best known as the author of the series, Contractor’s Guide to QuickBooks (Pro). Karen Mitchell of Online Accounting was kind enough to write a simple explanation of the different accounting methods available to contractors, with a basic example at the end. Money in a construction business flows differently than it does in most other industries, and you need an accounting system that acknowledges that. Too many CPA’s try to fit contractors into the same box they use for all other companies. That’s why your method of accounting matters, and why it’s important to have an accountant who understands construction. It isn’t as easy in construction, where a job might take a week, a month, or even more than a year to complete. It’s easy to know if you’ve made a profit when every transaction is complete in a day. The only way to make a profit in any business is to charge enough to cover all your direct costs and overhead expenses and still have money left over.
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