Construction Accounting and Financial Management Chapter 2 Construction
- Slides: 29
Construction Accounting and Financial Management Chapter 2 Construction Accounting Systems Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Purposes of the Accounting System n Process cash receipts and disbursements n Prepare financial statements n Pay Income and employment tax n Provide data for financial management Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Cost Reporting Versus Cost Control n Cost Reporting: q q q n Provides data after the opportunity has passed for management to respond to and correct the problems Shows where the company has been Reactive approach Cost Control: q q Provides data in time for management to analyze the data and make corrections in a timely manner Proactive approach Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Components of a Cost Control System n Strong job cost and equipment tracking q Costs must be current & up to date n Uses “management by exception” Management by Exception: a policy by which management devotes its time to investigating only those situations in which actual results differ significantly from planned results. Else, higher management is to mainly target & address “strategic” plans & decisions! n Follows established procedures n Data must readily be available Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Components of an Accounting System n General Ledger: q q n Job Cost Ledger: q n Chart of accounts (see Figure 2 -1) Balance sheet and income statement Costs by project Equipment Ledger: q Costs by piece of equipment or vehicle Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Method of Accounting n Cash n Accrual n Percentage of completion n Completed contract Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Cash n Revenue is recognized when payment is received n Expenses are recognized when bills are paid n Easiest to use n Little use for financial management because data is not up to date Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Accrual n Revenue is recognized when the company has the right to receive payment q Retention is not a revenue until the job is complete n Expenses are recognized when the company is obligated to pay bills n May pay income taxes on imaginary profits Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Percentage of Completion n Revenue is recognized throughout the project q Retention is recognized throughout the project n Expenses are recognized throughout the project n Estimated profits are equally distributed throughout the project q Based upon expected revenues and expenses Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Completed Contract n Revenue is recognized at completion of the project n Expenses are recognized at completion of the project n Revenues and expenses are known n Useless for financial management n May create large swings in income Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Balance Sheet n Assets = Liabilities + Owner’s Equity n “Snapshot” of a company’s assets, liabilities, and owner’s equity Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Current Assets n Cash n Accounts Receivable-Trade n Accounts Receivable-Retention n Inventory n Costs and Profits in Excess of Billings (Underbillings) n Notes Receivable n Due from Construction Loans n Prepaid Expenses n Other Current Assets q Total Current Assets (sum of above) Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Fixed and Other Assets n Land n Buildings n Construction Equipment n Trucks and Autos n Office Equipment q Total Fixed Assets (sum of above) Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Fixed and Other Assets n Less Accumulated Depreciation (Contra Account) q Net Fixed Assets (Total Fixed assets – Les Accumulated Depreciation) n Capital Leases n Other Assets q Total Assets (Total Current Assets + Net Fixed Assets + Other Assets) Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Liabilities n Current Liabilities n Accounts Payable-Trade n Accounts Payable-Retention n Billings in Excess of Costs and Profits (overbillings) n Notes Payable n Accrued Payables (including taxes and vacation) n Capital Lease Payable n Warranty Reserves n Other Current Liabilities q Total Current Liabilities (sum of above) Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Liabilities n Long-term Liabilities q Total Liabilities (Total Current Liabilities + Long-term Liabilities) Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Owner’s Equity (Corporation) n Capital Stock n Retained Earnings n Current Period Net Income q Total Equity Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Income Statement n Spans a period of time n Represents the transactions that occur between two balance sheets Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Income Statement n Revenue n Construction Costs n Equipment Costs q n Overhead q n Net Profit From Operations (Gross Profit – Overhead) Other Income and Expense q n Gross Profit (Revenue – Const. Costs – Equip. Costs) Profit Before Tax (Net Profit – Other Income and Expense) Income Tax q Profit After Tax (Profit Before Tax – Income Tax) Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Construction Costs n Materials n Labor q n Passes through payroll system and is charge to a job Subcontract q Always includes labor component n Equipment n Other Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Equipment Costs n Rent and Lease Payments n Depreciation n Repairs and Maintenance n Fuel and Lubrication n Taxes, Licenses, and Insurance n Equipment Costs Charged to Jobs (Contra) n Equipment Costs Charged to Employees (Contra) q Total Equipment Costs Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Relationships n Balance Sheet q n Income Statement q n Assets = Liabilities + Equity Revenue = Expenses + Profit Balance Sheet and Income Statement q Change in Equity = Profit Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Job Cost Ledger n Provides breakdown of construction costs on income statement n May provide a breakdown of revenues on the income statement n Costs are broken down by: q q Job Phase (optional) Cost code Cost type Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Job Cost Ledger Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Job Cost Code Structure Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Relationships n Income Statement and Job Cost Ledger q q Revenue = Revenues Construction Costs = Construction Costs n n n Excludes Committed Costs not Recognized Materials = Materials Labor = Labor Subcontract = Subcontract Equipment = Equipment Other = Other Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Equipment Ledger n Provides breakdown of equipment costs on income statement by piece of equipment n May provide additional breakdown Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Equipment Ledger Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
Relationships n Income statement and Equipment Ledger q q Charge Costs = Cost Allocated Costs = Costs n n n Rent and Lease Payments = Rent and Lease Payments Depreciation = Depreciation Repairs and Maintenance = Repairs and Maintenance Fuel and Lubrication = Fuel and Lubrication Taxes, Licenses, and Insurance = Taxes, Licenses, and Insurance Construction Accounting & Financial Management, 3/e Steven Peterson © 2013 by Pearson Higher Education, Inc Upper Saddle River, New Jersey 07458 • All Rights Reserved
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