Updated: Aug 3, 2020
Accounting is one of the most important elements of management and administration in business. In common, 80% of all accounting is regular accounting with the basic financial reports. In the meanwhile, 15% is construction accounting and the 5% left is manufacturing accounting. Whether a construction company owner or an bookkeeper, it is necessary to be aware that construction accounting is different from a regular accounting.
For example, a typical business, such as a wedding dress shop, uses regular accounting principles. The result is that they are selling products from a fixed location. Besides, the business could understand and separate cost of each item it sells and relative overhead. A construction company, on the other hand, has to set up construction accounting to allocate costs per particular contracts. These costs primarily include materials, labours with additional changes such as consulting, architectural fee. In addition, a number of indirect costs such as supervision, equipment rentals or insurance are charged. Sometimes, administrative costs could be charged if they are allowed by the customer.
In summary, Key Differences between Regular and Construction Accounting could be listed as below:
Sales: Regular business account for sales and often has 1-5 categories of products and services they provided. Construction accounting offer up to 10 categories of products and services.
Cost of Goods Sold: Regular accounting simply record the cost of the product sold. A wedding dress shop owner could recognize fabric, costs for tailors as cost of goods sold. In construction accounting, because contractor needs to concern both direct and indirect costs relating to the project, it is more complex to set up cost of goods sold.
Expenses: whereas overheads in the regular business are expenses used to maintain the business operations, overhead in construction accounting requires more analysis because some expenses in regular accounting are recognized as Cost of Goods Sold in construction accounting.
Breakeven time: In regular business, it is easy to calculate breakeven because revenue and expenses are clearly shown on report. By analyzing reports you can determine which items are profitable and unprofitable, then make adjustments when needed. In construction industry, it is very difficult to calculate because projects are unique custom jobs with intricate requirements and a variety of associated costs.
According to some key differences between regular accounting and construction accounting, it is necessary to understand different types of costs you could incur working in a project. Then, a business should categorize those costs, understand cost of goods sold and expenses as well as the complexity of the project that the company performs. Understanding the industry the business works in could help you to choose the correct accounting principles and keep your accounting data correctly.
If you need any advice or services on any aspects of construction bookkeeping, accounting or tax, our construction accounting specialists are ready to help. Get in touch with us for free quote.