Keeping track of all money moving in and out of your construction business can be challenging and time-consuming, that is why you need to create a chart of accounts. It will allow you to track every transaction by category and subcategory.
Put simply, a chart of accounts (COA) is the foundation of an accounting system of a construction company. A chart of accounts for construction companies provides the structure to organize financial transactions. It’s a key component of a company’s financial recording and reporting system.
Explore the definition of a chart of accounts for construction company and find out how to create a chart of accounts with our comprehensive guide.
TABLE OF CONTENT What is a chart of accounts?
What is a chart of accounts?
A contractors chart of accounts consists of all the financial accounts in your company’s general ledger. This organizational tool allows you to break down all the transactions that your company conducted during a specific accounting period into different subcategories. Each subcategory has to correspond to the structure of the construction company’s financial statements.
By separating out your expenditures, revenues, assets, and liabilities, a chart of accounts enables you to gain insight into the effectiveness of your business’s area. Not only used to organize finances, but your construction company also uses it to give interested parties, such as investors and shareholders, a clearer insight into your company’s financial health.
Sample chart of accounts for construction
Here is a basic sample list of account numbers that provides the skeleton of the financial reporting system:
1000 Assets
1001 Current Assets
1701 Long-term Assets
2000 Liabilities and Equity
2001 Current Liabilities
2501 Long-term Liabilities
3000 Income and Direct Expense
4000 Indirect Expenses
5000 Financing Expenses
6000 Sales and Marketing Expenses
7000 Rental Operations Expenses
8000 General and Admin Expenses
9000 Other Income and Expenses
The accounts in the list above provide the structure for the construction company’s financial statements and are tailored to provide the information needed on those reports. Common reports for a construction company include income statements, balance sheets, and work-in-progress reports. Our Irvine Bookkeeping provides your construction company with our accounting and bookkeeping for contractors. Help you optimize your time.
How a chart of accounts works in construction
Construction companies use a chart of accounts to organize financial transactions in order to build financial statements. When a transaction is entered, it becomes recorded in a double-entry system. Financial statements summarize these transaction amounts for a given time period.
The accounts fall into the corresponding categories based on the type of work your construction company performs and how income is recognized. For instance, material suppliers and equipment company rental companies are going to have very different charts of accounts than a contractor.
COAs can vary and be tailored among construction companies, no two companies are exactly alike. Each company develops its own COA based on its requirements and operation. However, they also comply with the guidelines set out by the Financial Accounting Standards Boards (FASB) and Generally Accepted Accounting Principles (GAAP).
Once the overall structure of the chart is established, it is kept the same from year to year. As a result, it ensures that accurate comparisons of the company’s finances can be made over time.
Why construction businesses need a chart of accounts
The chart of accounts for construction is very important for several reasons.
As mentioned, the most important role is to provide you with a clear picture of the financial health of your construction company.
When you record full details, do bookkeeping for contractors, and track every transaction, you know exactly where your construction company is marking and spending money. Everything from a new bank loan to an invoice from a supplier is recorded inappropriate categories, making it easier to find.
Read More: 6 Key Construction Accounting Best Practices
How to create a chart of accounts for a construction company
Before you start building your own COA, there are some key components that will help you shape your account structure – regardless you are a supplier or contractor, you need to recognize income and track indirect expenses.
Material suppliers and contractors need two different COA structures. For suppliers, the account structure is much simple than a contractor because they recognize income when they sell materials. Meanwhile, contractors have to keep track of the progress of projects. Also, contractors have more complex income streams and generally are recognizing their income based on the completion of work.
Recognizing income
There are two fundamental ways to recognize income in construction, including completed contracts or percentages of completion.
The first recognizes income when a project is totally complete and the invoice is sent at the end. On the other hand, the percentage of completion recognizes income at regular intervals as the project progresses.
Tracking indirect expense
Indirect expenses are expenses that provide support to the construction of projects but aren’t specific to any one entity. They can include rent, phone bills, advertising, legal fees, labor burden, or travel expenses. Some companies consider these expenses as administrative expenses and others track them as indirect job expenses.
And now you’ve figured out what type of company you are (supplier and contractors) and determined how you recognize your income, and whether you want to track indirect expenses, you can organize your COA
Basic account categories
While COAs can vary from company to company, there are some basic categories that will be reflected in your financial statements, including the balance sheet and the income statement.
In a chart of accounts, accounts are shown as the order they appear on your financial statements. Assets, liabilities, and shareholder’s equity (balance sheet accounts) are shown first
Assets
Assets accounts belong to the first category on your chart of accounts
Bank accounts: checking and savings accounts
Accounts receivable: amounts owing to you for work performed
Retention receivable: amounts owners are holding until work is completed
Equipment/land/buildings: any other assets your company owns that help you do your work
Underbillings: when you bill less than you’ve completed (percent complete income recognition)
Inventory: material suppliers’ inventory on hand, developers land, and work in progress
Income
Sales: income from project or material sales
Interest income: income earned from interest on bank accounts or other investments
Over/under billings adjustment: necessary adjustments to make income match percent complete
Expenses
Administrative costs: admin labor, software
Office expenses and rent: building rent, office supplies, postage, shipping
Taxes: business income taxes and sales tax
Insurance: general liability, automotive, workers comp, and umbrella coverages
Indirect expenses
Vehicle expense: costs for fuel and maintenance for vehicles driven by field personnel
Phones: costs for equipment and service contracts for field personnel
Liabilities
Customer deposits: customer down payments and interim payments when using the completed contract method
Accounts payable: amounts owing to vendors for materials, equipment, subcontractors
Retention payable: amounts owing to vendors held until work is completed
Loans: company or project loans outstanding
Overbillings: when you bill more than you’ve completed (percent complete income recognition)
Retained earnings: company profits or losses from the previous fiscal year
Cost of Goods Sold
Labor costs: includes wages, benefits, employer taxes
Material costs: raw materials for the finished product
Subcontractors: trade contractors and others
Equipment: cost of rental or owned equipment
Now that you have learned the fundamental parts comprising a chart of accounts. You can begin to build your own COA by the chart of accounts for construction company excel that grows with business with your construction business and helps you succeed. Remember when you’re building a chart of accounts, consistency is key. Try to avoid frequently changing your contractors chart of accounts so that you can more easily compare results. Whenever you have a doubt, consult with your professional account to avoid confusion.
Read More: Best Practices for Construction Accounting Read More: Job Costing Essentials for Contractors
Developing your contractors chart of accounts can be tricky and time-consuming. Everything from defining an appropriate framework, the complex requirements of the construction industry, revising your chart of accounts for construction company excel regularly can distract you from your main tasks to grow your business and produce revenue.
We’re here to help you build a solid financial foundation for your construction business. Your business’s accounts list and accounting system are personalized to fit your needs. Our dedicated bookkeepers will help you track accurately income and expenses, import reports to assess your company’s financial health.
Now you can fully focus on successful construction projects to stay on top of high revenue-generating construction companies and let us take over your bookkeeping for contractors and accounting system. Let get free initial consultation here.
