How To Build The Chart of Accounts For A Construction Company
- Cost Construction Accounting
- Jun 7, 2022
- 4 min read
Updated: Nov 11
Whether you’re steering a bustling construction firm or a dynamic service-based business, a finely tuned Chart of Accounts (COA) is your key to unlocking a clear, confident view of your company’s financial health.
At its core, the COA is the bedrock of a seamless bookkeeping and accounting system. It empowers you to meticulously track every financial transaction—revenues, expenses, assets, liabilities, and equity, while effortlessly generating vital reports like income statements and balance sheets. For general contractors, a customized COA is more than a tool; it’s a strategic asset that ensures precise oversight of direct costs, operating expenses, and every financial detail that drives your success.
Curious about what makes a construction company’s COA so essential? Let’s dive into its definition, uncover its pivotal role in construction accounting, and explore how to craft a COA that streamlines project management and delivers pinpoint-accurate financial insights. Keep reading to transform the way you manage your business’s finances!
What Is A Chart of Accounts For A Construction Company?
A chart of accounts is a comprehensive listing of all the accounts used in a construction company's general ledger (GL). These accounts are organized into categories and subcategories that align with the company's financial reporting system, facilitating accurate financial reporting and compliance with generally accepted accounting principles (GAAP).
Accounts are numbered into a commonly accepted structure and appear in the same order. Depending on the type of your construction business, an account number can be three or four digits long. This numbering system helps organize asset accounts, liability accounts, revenue accounts, and expense accounts efficiently.
Below is a sample account structure commonly used in construction:
1000–1999: Assets (including bank accounts, accounts receivable, equipment rentals)
2000–2999: Liabilities (including accounts payable, loans, retained earnings)
3000–3999: Equity
4000–4999: Income (including construction revenue, contract revenue)
5000–5999: Direct Costs (e.g., labor costs, materials, subcontractors)
6000–6999: Overhead and Indirect Expenses (e.g., operating expenses, administrative costs, vehicle expenses)
7000–7999: General & Administrative Expenses (e.g., office expenses, legal fees, business income taxes)
What Makes a Chart of Accounts for a Construction Company Unique?
Construction companies require specialized accounts to manage the complexity of construction projects and project specific expenses. Unlike material suppliers who recognize income upon sale, contractors recognize income based on project completion or percentage of completion, resulting in multiple income streams.
In addition to common expense accounts, construction-specific accounts include:
Retention receivable and payable to track withheld payments
Work in Progress (WIP)Â accounts for unfinished projects
Equipment rentals and rental or owned equipment tracking
Job costs that capture direct expenses like labor and materials
Project profitability accounts for detailed financial analysis
These construction-specific accounts ensure precise financial management and enable you to generate detailed financial reports that reflect your company's true financial performance.
Why A Chart of Accounts Is Important?
Generally, the chart of accounts for a construction company helps to organize financial transactions to provide information for financial statements. In other words, it is like a blueprint that outlines the way your financial building is being constructed:
Consistency: Ensures all recurring and one-time transactions are recorded in the correct accounts, making it easier to track spending money and income over time.
Accurate business decisions: Supports the preparation of accurate financial statements such as the income statement and balance sheet, giving a clear picture of your company's financial health.
Ease of use for employees: With an organized account structure, there’s no guesswork in where to record a new transaction, making it easy for you to locate any bit of financial data.
Tips For Improving The Chart of Accounts
1. Avoid frequent changes to your chart of accounts
Once established, maintain consistency in your COA to allow for meaningful comparisons over time. If changes are necessary, implement them at the start of a fiscal year and consult with your accountant to avoid confusion.
2. Design your COA around numbers
Each account on the chart of accounts contains an identification code, description, and name. When you design your COA around numbers, you end up keeping your general leger ordering systems simple.
3. Regularly review your chart of accounts
You should regularly review the char of accounts to see if any accounts contain unnecessary data. If so, just shut down these accounts to keep your chart of accounts at a manageable size.
4. Minimize the number of accounts
The chart of accounts for a construction company is typically complicated, so it’s important to define the number of accounts. This reduces the chances of having repeat and unessential accounts in your COAs. Fewer accounts mean increased processing speed and reduce bookkeeping and accounting time
How CCA Can Help You Build the Perfect COA
Building a proper chart of accounts is an important part of setting up your accounting and bookkeeping process.
Construction Cost Accounting offers outstanding bookkeeping and accounting services. We help you build a tailored chart of accounts so you can get the most out of your accounting system. With our help, your well designed QuickBooks construction chart of accounts can drive real business benefits, including improving your company’s job-costing abilities and thus boosting your profitability.
Schedule an appointment with our experts so we can get you on the fast track to exceptional contractor bookkeeping and accounting.
