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Contractor Accounting Vs. Regular Accounting

Posted by Randal DeHart on Fri, May 17, 2013

Construction Accounting Vs. Regular Accounting

All Accounting Uses The Accounting Equation

Fast Easy Accounting 206-361-3950 Contractors Bookkeeping Services Accounting Equation 

Business Owners - Need three basic reports, Cash, Profit and Equity

Cash On Hand................(Bank Balance - Un-cleared Checks) = Cash

Profit And Loss Report.........................(Sales - Expenses) = Profit

Balance Sheet Report..........................(Assets - Liabilities) = Equity

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Regular Accounting - Is roughly 80% of all accounting and Accounting for businesses in the world and is concerned with the basic financial reports which are used for preparing annual tax returns and some very rudimentary management decisions:

  1. Accounts Receivable

  2. Accounts Payable

  3. Profit & Loss

  4. Balance Sheet

It Is Practically All that is taught in schools, colleges and universities.

Regular Accounting Is Used In Fixed Environments - Where customers comes to the place of business or at most you ship or deliver a packaged product. In essence you are selling a product or a service from a fixed location.

Regular Accounting Has These Things In Common:

  1. Sales - With 1-4 categories

  2. Cost of Goods Sold - If they sell products with 1-4 categories

  3. Expenses - Overhead required to maintain business operations

  4. Breakeven - Is fairly easy to calculate because there is a direct relationship between income and expenses on every item. It is easy to run reports to determine which items are profitable and unprofitable and make adjustments quickly as needed.

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Construction Accounting - Is roughly 15% of all accounting and Accounting with manufacturing making up roughly 5%. So it is given very little attention in schools, colleges and universities.

Construction Accounting Is Used In Mobile Environments - Which means having a contractors bookkeeping services system that can track the costs that contractors incur related to doing custom work in a strictly mobilization environment. Some of the costs include travel time, mobilization (packing the tools, equipment, labor and material at their warehouse, delivering everything to the job and unpacking it) before starting the work and then demobilization (reversing the entire process when the job is finished).

Construction Accounting Is Built Upon Regular Accounting and shares the same basic financial reports and a number of other reports which contractors use to operate and grow their construction companies and know which jobs to pursue and which ones to let go:

  1. Accounts Receivable

  2. Accounts Payable

  3. Profit & Loss

  4. Balance Sheet

  5. Cash Balance

  6. Job Costing Reports

  7. Job Profitability Reports

  8. Earned Value Reports

  9. Work-In-Process Reports

  10. Estimates Vs. Actuals Reports

  11. Payment Applications

  12. And more...

When I see the damage caused to contractors making management decisions on inaccurate reports it really hurts. There is a better way - The System Is The Solution

Our Contractor Bookkeeping Services System Is A System

Contractors Bookkeeping Services

This Type Of Accounting Is Used - When the entire place of business is packed up and taken it to the customer. In essence you are selling, assembling, delivering and installing a customized product from a mobile shop on location. Think of it like shooting a movie on location without all the glamor, resources and money to go with it.

Construction Accounting Has These Things In Common:

  1. Sales - With 1-10 categories

  2. Cost of Goods Sold - Has Direct and Indirect Job Costs with 25 - 200 categories with 1,000s of sub categories

  3. Expenses - Overhead is extremely complex because some expenses in regular Accounting are actually Cost of Goods Sold in construction accounting

  4. Breakeven - Very difficult to calculate because most projects are one-of-a-kind custom jobs. Proactive contractors have systems and cost libraries with pre-priced assemblies for bidding which works in conjunction with Strategic Construction Accounting to provide management with progress invoicing, job costing and job profitability.

  5. Job Costing and Job Profitability Reporting - Is similar to the Company Profit and Loss report except that it is specific to each particular job and has different expense codes. These reports in combination with the Five Key Performance Indicators are what help the contractor understand which projects to pursue and which ones to ignore. They form the foundation of a Business Process Improvement Plan and Construction Business Strategy.

Shown Below Is A Short List Of Titles commonly used for construction accounting and regular accounting. The list is intentionally short in order to make the point without being completely overwhelming.

Construction Accounting Titles = 233

Regular Accounting Titles = 115

Construction Accounting Titles Vs. Regular Accounting Titles Fast Easy Accounting

We Never Cease Being Amazed - When we find someone who is doing the Accounting for a contractor and other unrelated industries and treats the construction business like any other business.

Example #1 - The contractor asks the bookkeeper "How much money did we make on the John and Mary Doe house remodel?" The bookkeeper generates a report showing $5,000 profit when in reality it was a ($15,000) loss! QuickBooks setup was done like every other Accounting business and $20,000 worth of transactions was put in the wrong category. In this case some direct costs and some indirect costs were misallocated and not assigned to the job. 

Example #2 - The contractor asks the bookkeeper "How much money did we make on the Bob and Sally house remodel?" The bookkeeper generates a report showing ($5,000) loss when in reality it earned $5,000 profit! QuickBooks was setup wrong and $10,000 worth of transactions was put into the wrong category. In this case some overhead costs were classified as direct costs and assigned to the job.

The Inevitable Result Is - The contractor makes bad decisions on what to bid and not to bid on and eventually runs out of time and money.

For More Information See QuickBooks Setup For Contractors

Professional Accounting Services At An Affordable Price

Profitable Construction - Companies have known about the value of outsourced bookkeeping services for a long time and now you know about it too!

We Are QuickBooks Desktop Version And Xero Accounting Online Experts Specializing In Construction Bookkeeping Services

 

 

About The Author:

Randal DeHart, PMP, QPA The Construction Accountant Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and construction accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and Xero accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.

Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Follow Randal on Google+

Topics: Contractor Accounting And Regular Accounting

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