Construction costs are accounted for through a project accounting system where costs are charged to a particular contract that has been established as a project in the system. The project accounting system allows several construction projects to be in progress at the same time with the costs accounted for separately for each project.
Costs generally fall into three categories: direct costs, such as hand labor, materials and sub-contracting; Indirect costs such as indirect labor, supervision, tools, equipment costs, supplies, insurance and support, and selling, general and administrative expenses, which are excluded from the cost contract, As they apply to the general administration of the company and cannot be easily identified with a particular project. In general, there are two methods of accounting that can be used for information purposes: the finished contract method and the degree of progress.
Log daily transactions in newspapers, in the beginning. It periodically summarizes and publishes transaction information to general ledger accounts, where each transaction is recorded as both a debit and a credit to particular accounts in the general ledger. For example, payment for construction materials represents an increase in debit or an account of project costs and a credit or reduction in the company’s cash account.
Carry out financial reports under the completed contract method. Using the completed contract method the income is only reported for completed projects. Work in process (costs) is only reported on the balance sheet, resulting in an asset if contract billing exceeds costs or a liability if costs exceed contract billing. The total net profit or loss is reported in the final period, when the project has been completed and has a direct impact on revenue only during that period. The completed contract method of accounting is entirely retrospective (the company will not know if there will be a loss in the project until the end) and does not provide any guidance for management during the project period.
Decide which of the two methods you are going to use and be consistent. Under the percentage of completion method, costs are presented in the income statement together with a pro rata share of all project revenues (or invoices) equal to the proportion of work performed during the period. The proportion of work done is determined by dividing the costs for the period of the total estimated costs of the project. The percentage-of-completion method estimates actual revenues in each period, but is susceptible to possible manipulation of results that may distort the actual position of the firm.