Construction Accounting

A form of projecting accounts used in construction projects is known as construction accounting.  Construction accounting has evolved as a very important form of accounting. When multiple contracts come into play, the role of this form of projecting account is very fundamental. In this accounting many terms like draw and progress billing are used. These terms are not used in other forms of accounting. Construction accounting also keeps track on vehicles and equipments owned by the company as fixed asset. Based on the amount of business done, this accounting requires invoicing and vendor payment. Construction costs to the applicable contract will be charged in construction accounting. Direct Costs include labor, material and subcontracting costs. Indirect labor, supervision, tools, equipment costs, supplies, insurance and support costs are the indirect costs. Selling, general and administrative costs are not included in contract costs. Labor cost is a major portion in overall project cost. So time sheets of employees are maintained in project accounting. This helps to generate the data necessary to allocate project costs.

Project Accounting

The practice of maintaining financial reports to track the financial progress of projects is known as project accounting. Project accounting is commonly used by managers with an aim to aid project management. Standard accounting monitors the financial progress of organizational elements like geographical or functional departments. In construction accounting, projects costs and revenues are allocated after subdividing them into a work breakdown structure. Project accounting is mostly used by government contractors. Project manager independently assesses the percentage of completion of the project. Project budget that is adjusted based on the percent of completion is used to calculate funding advances and actual to budget cost variances. Production accounting is another specialized form of project accounting.

Revenue recognition of construction accounting

For contracts in progress, construction accounting requires unique revenue recognition. Percentage of Completion Method is used to calculate the revenue in construction accounting. The anticipated profit for the project when multiplied with estimated percent complete of the project gives an idea about the project in progress under the percentage of Completion Method. This method has a risk of relying upon estimates. Completed Contract method is also used to calculate the revenue in construction accounting. Till the contract is complete, contract revenues and costs are not estimated in Completed Contract Method. We can use the Completed Contract Method in circumstances where it is very difficult to calculate reasonable estimates.

Questions:

• Explain the benefits of construction accounting?
• What is project accounting?