Construction costs are accounted for through a project accounting system where costs are charged to a contract particular has established itself as a project in the system. The project accounting system allows multiple construction projects are in progress at the same time costs accounted for separately for each project.
Costs generally fall into three categories: direct costs, such as hand labor, materials and sub-contracting; indirect, such as indirect labor, supervision, tools, cost equipment, supplies, insurance and support and selling expenses, general and administrative expenses, which are excluded from contract costs, as they apply to the general administration of the company and they cannot be easily identified with a particular project. In general, there are two accounting methods that can be used for information purposes: the completed contract method and the degree of progress.
- Logs daily transactions daily, initially. Periodically, it summarizes and publishes information of transactions to general ledger accounts where each transaction is recorded as both a debit and a credit to private accounts in the general ledger. For example, payment for building materials represents an increase of debit an account of the project costs and a credit or reduction in the cash account of the company.
- Make financial reports under the completed contract method. Using the completed contract method only reported income for completed projects. Work in process (costs) only reported in the balance, resulting in an asset if the contract exceeds billing costs or a liability if the costs exceed the contract billing. The total net profit or loss reported in the fourth quarter when the project is completed and impacts directly on income for that period only. The completed contract method of accounting is entirely retrospective (the company will not know if there will be a loss on the project until the end) and provides no guidance for management during the project period.
- Decide which of the two methods you will use and be consistent. Under the method of percentage of completion, costs are presented in the income statement, along with a pro rata share of all revenues of the project (or bills) equal to the proportion of work performed during the period. The proportion of work is determined by dividing the costs for the period of total estimated project costs. The method of percentage of completion estimated real income in each period but is susceptible to possible manipulation of the results that can distort the actual position of the company.