How should I record construction accounting?
Construction accounting records every transaction with a job number attached. When you buy materials, the expense gets coded to the specific project. When you pay your crew, labor gets allocated to the job they worked on. Subcontractor invoices get tagged to the project they’re working. This job-level tracking is what separates construction accounting from regular business bookkeeping.
Revenue recognition uses percentage-of-completion or completed-contract method. Most contractors use percentage-of-completion, which means you recognize revenue as work progresses based on costs incurred relative to total estimated costs. If a $100,000 job is 60% complete based on costs, you’ve recognized $60,000 in revenue even if you haven’t billed or collected that much yet.
Progress billing gets recorded separately from revenue. When you invoice a customer for work completed, that’s accounts receivable. The revenue was already recognized as the work happened. Retainage held by the customer gets tracked as a separate receivable until it’s released after job completion.
Cash basis doesn’t work well for construction because it hides profitability. A job might be very profitable but if you bought all the materials upfront and haven’t been paid yet, cash basis makes it look like you lost money. Accrual basis with job costing shows actual project performance.
Subcontractor payments need tracking for 1099 compliance. Every check to a sub gets recorded with their tax ID so you can issue 1099-NEC forms at year end. Miss those filings and you face penalties.
Construction and trade businesses that don’t use proper job costing can’t tell which types of work are profitable. Generic bookkeeping that just tracks income and expenses by month doesn’t work. You need project-level visibility to bid accurately and make informed decisions about which work to pursue.
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