When you run a construction company, you can’t afford to lose track of your finances for one moment. So how do you stay organized and up to date with your financial data? It starts with a proper chart of accounts. When done well, your chart of accounts ensures your financial statements accurately reflect the health of your company and helps you analyze your data to make informed decisions for your business.
In this Article
What is a Chart of Accounts in Construction?
A chart of accounts is a list of all the accounts used by a company to record financial transactions. It provides a systematic way of organizing financial information, making it easier to generate accurate financial statements and track your revenue, expenses, assets, liabilities, and shareholder equity. It also serves as the foundation of your general ledger, which is the central repository for all your financial data.
Understanding the Chart of Accounts
Structure and Organization
The structure of your chart of accounts should reflect the unique needs of your construction company and should be organized in a way that makes sense to you and your team.
Typically, the chart of accounts is divided into categories and subcategories. The categories in your chart of accounts include revenue, expenses, assets, liabilities, and equity. Within each category, you will create subcategories to further break down the types of transactions you record. For example, within the expenses category, you may have subcategories for labor costs, materials, subcontractor expenses, and equipment.
Categories and Subcategories
Here are some common categories and subcategories that you may want to consider when creating the chart of accounts for your construction company:
- Revenue: This category includes all the revenue generated by your construction company. Subcategories may include contract revenue, service revenue, and discounts, etc.
- Direct Expenses: This category includes all the costs associated with running your construction company and include labor costs, materials, subcontractor expenses, equipment, and travel expenses.
- Overhead expenses: This category includes expenses related to the running of the business outside if direct costs like rent, administrative salaries, and utilities.
- Assets: This category includes all the resources owned by your construction company. Subcategories may include cash, accounts receivable, inventory, and equipment.
- Liabilities: This category includes all the debts owed by your construction company. Subcategories may include accounts payable, loans, and taxes payable.
- Equity: This category includes the value of your construction company’s assets minus its liabilities. Subcategories may include retained earnings and shareholders equity.
Put some thought into carefully structuring and organizing your chart of accounts. This ensures that your financial transactions are recorded accurately and consistently. Let’s dive into what can be included in each of these categories.
As a construction company, your revenue is generated from a number of different sources. Each of these sub categories could contain sales, service and other types of revenue.
Sales Revenue or Construction Revenue
Sales revenue is the revenue generated from the sale of goods or products. In the construction industry, this can include the sale of building materials or equipment. It is important to track sales revenue separately from service revenue, as it may be subject to different tax regulations.
Service revenue is the sales generated from providing services to customers. As a contractor, your company may provide services such as construction, renovation, or maintenance. Note that it can be beneficial to track service revenue differently from construction revenue because service revenue is more valuable, if you were to ever sell the company.
Other revenue includes any revenue that doesn’t fall under the categories of sales or service revenue. This can include discounts taken or interest earned on investments.
Tracking your revenue accurately is crucial for billing customers and managing projects effectively. By separating your revenue into these categories, you can easily identify which areas of your business are generating the most sales and make informed decisions for future projects.
Meticulously tracking your expenses allows you to make informed decisions for your business. Expenses can be broken down into three main categories: Direct Costs (or Cost of Goods Sold), Operating Expenses, and Non-Operating Expenses.
Direct Costs or Cost of Goods Sold (COGS) is the cost of the materials and labor used to complete a project. This includes expenses like materials, labor, equipment and subcontractors directly used to do a project. Keeping track of COGS is important because it allows you to accurately calculate the profit margin on each project and make adjustments to pricing as needed.
Overhead or Operating Expenses
Overhead or operating expenses are the day-to-day expenses of running your business. These expenses include office expenses, office payroll, rent, utilities, vehicle expenses, insurance, taxes, advertising, and depreciation. It’s important to keep track of these expenses in order to accurately calculate your net income.
Assets are resources that your company owns or controls, which have the potential to generate future benefits. As a construction company, your business relies heavily on various assets to carry out day-to-day operations.
Current assets are assets that can be converted into cash within a year or less. These assets are essential for your company’s daily operations. Your current assets include things like cash, retainage receivable, operating bank accounts, accounts receivable, and inventory.
- Cash is the most liquid asset and is used to meet short-term obligations, like paying for supplies and materials.
- Accounts receivable represents the money owed to your company by customers for services rendered or products sold.
- Inventory includes the materials and supplies that your company holds in stock, such as lumber, concrete, and electrical supplies. Lots of construction companies don’t use inventories in their books, while others use inventory for items they build that later get sold into projects.
- Retainage receivable is the amount you are owed when the project is complete that was held out of your contract.
Fixed assets are long-term assets that are not intended for sale and are used in the production of goods or services. Fixed assets include things like land, buildings, trucks and equipment.
- Land is a non-depreciable asset that your company may own for future use, like for the construction of a new building.
- Buildings include any structures that your company owns or leases, such as offices, warehouses, and construction sites.
- Equipment includes any machinery or tools that your company uses to carry out construction projects, such as bulldozers, cranes, and power tools.
Other assets refer to any assets that do not fall under current or fixed assets. These assets may include long-term investments, patents, and trademarks.
By keeping track of your assets, you can ensure that you have the necessary resources to carry out your projects efficiently and effectively.
Liabilities are financial obligations that your company owes to others, and they can be short-term or long-term. You’ll track various liabilities in your chart of accounts.
- Current liabilities are those that are due within one year or less. These include accounts payable, prepaids, current portion of loans, and subcontracts payable.
- Accounts payable are amounts that you owe to suppliers for goods and services that you have received but not yet paid for.
- Retainage payable is the amount owed to other contractors or suppliers you are in business with on projects. This is normally a current liability, but could be long term depending on the length of a project.
In addition, you have to account for taxes that you owe to the government, such as sales tax, payroll tax, and income tax. These taxes are usually due quarterly or annually, depending on the type of tax and your company’s size.
Long-term liabilities are those that are due more than one year from now. These include loans that you have taken out to finance your construction projects, such as mortgages, equipment loans, and lines of credit.
It’s important to keep track of your liabilities in your chart of accounts so that you can monitor your company’s financial health and make informed decisions about future projects and cash flow.
Equity represents the residual value of your company’s assets after all liabilities have been paid off. It’s the owner’s stake in the business and reflects the amount of money that would be left over if the company were to sell all of its assets and pay off all of its debts.
Shareholders equity is the portion of equity that belongs to the owners of the company. This includes any investments made by the owners, as well as any profits that have been retained in the business. Owner’s or shareholders equity is calculated by subtracting the company’s liabilities from its assets.
As a construction company, you may have multiple owners, each with a different percentage of ownership. It’s important to keep track of each owner’s equity separately, as this will affect their share of any profits or losses.
Retained earnings are the profits that have been earned by the company but have not been distributed to the owners as dividends. These profits are retained in the business and can be used for future investments or to pay off debt.
Retained earnings are an important part of equity, as they represent the company’s ability to generate profits over time. It’s important to track retained earnings separately from owner’s equity, as this will allow you to see how much of the company’s equity is tied up in profits that have not yet been distributed.
As a construction company, there are several things that you need to know as you build your chart of accounts. These considerations include project-based accounting, inventory and equipment management, and subcontractor and supplier accounts.
Construction accounting is project-based, meaning, when it comes to accounting, each project is treated as a separate entity. So, you need to have a chart of accounts that can handle project-based accounting. This includes creating a new job for each project, tracking expenses and revenue by project, and maintaining accurate records of each project’s financial performance.
Inventory and Equipment Management
Construction companies often have a large inventory of materials and equipment that need to be managed properly. This includes tracking inventory levels, monitoring equipment usage, and ensuring that all equipment is properly maintained. Having a chart of accounts that includes specific accounts for inventory and equipment management can help streamline this process.
Subcontractor and Supplier Accounts
Construction companies work with a variety of subcontractors and suppliers, each with their own set of accounts. Your chart of accounts needs to be able to handle subcontractor and supplier accounts, including tracking payments, managing retention, and billing for materials and services. This helps ensure that all accounts are accurate and up-to-date, which enables more efficient and accurate business decisions.
Overall, having a chart of accounts that is tailored to the construction industry can help contractors and subcontractors manage their finances more effectively. By including industry-specific accounts for materials, suppliers, inventory, equipment, and overhead expenses, construction companies can make more informed decisions and improve their overall efficiency.
Implementation and Management
Like I mentioned before, you should organize your chart of accounts in a way that makes sense for your organization. The goal is to structure them in a way that gives you adequate insight into where your revenue comes from and which areas are worth growing. If all your work is basically the same, you can keep it simple. On the other hand, if you operate in many areas, breaking out your categories further may give you the insight needed to grow a more profitable company.
As you begin to categorize your transactions, it’s important to stay consistent over time. This allows you to understand where expenses are getting higher than you expect or where you over estimated certain types of work. You should periodically review and update your chart of accounts to reflect changes in your business.
Here’s a sample chart of accounts for a construction company to help you get started:
|Accounts Receivable – Retainage
|Accounts Payable/Subcontractor Retainage
|Credit Cards Payable
|Payroll Taxes Payable
|Property,Plant and Equipment
|Other Current Assets
|Other Current Liabilities
Use this sample chart of accounts as a starting point, and ten customize it to fit the unique needs of your construction business. By properly implementing and managing your chart of accounts, you can set your business up for long-term success.
Further Reading: Essentials of Construction Accounting: A Contractor’s Guide