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Contractors often have a difficult time keeping their business dealings in the black. In fact, a considerable amount of new contractor businesses have to close within 5 years. That begs the question, what are some tips for bookkeeping for general contractors?
What can contractors do in their bookkeeping to help keep their business stay well organized? What will help make sure their income and expenses are always clear and accessible to them?
One size does not fit all.
Not all businesses should keep books and records the same way. A large corporation will keep books in a different way than say a small company with under 5 employees. The way employee time sheets are kept will affect company records. Showing more detail in operations by means of a more comprehensive general ledger.
A bakery will keep books differently than say a service company such as a law firm, small or large. Why is that? Because some companies have inventory to keep track of at any given time (which is an asset for them by the way).
While a service company would not primarily track tangible items, but hours spent working on particular clients. This done so that they can in turn bill those clients for their hours, or assess the value of the relationship. In the case of bookkeeping for general contractors, there are other factors to keep in mind.
One is that there are materials purchased for the sake of a project, in addition to hours are spent. So expenses, as well as hours are tracked to properly assess how a profit can be made overall and on a particular project.
Which accounting method should be used in Bookkeeping for General Contractors?
That is a great question! We can consider the accrual method vs. the cash method. The accrual method is a way to show consistent income and expenses that occur monthly and yearly.
With that method, you would take recurring expenses such as rent, insurance & company auto leases, and record the expense at the time you incur the expense – monthly or yearly, no matter what. Not when you pay the bill. This can be seen through an example: An accrual entry would record rent in the month it is incurred, say January, same with February, and so on.
But say the bookkeeper actually wires the rent payment for January on January 1st, and then wires the February rent on Jan 30th, to make sure it is in on time since Jan 31st and Feb 1st fall on a weekend.
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That is okay because with the accrual method the expense is always booked, not according to when the expense is paid, but when it is incurred.
On the other hand, using the cash method, the expense would be booked exactly when the funds left the bank account. In that same example, rent expense would show as booked twice in that month, since it was paid twice in that month.
Now that we have a basic understanding of the difference between the two accounting methods, which of these methods is more advantageous for bookkeeping for general contractors? Well, why would someone have to show a consistent expense every month no matter what?
One reason would be that they are a manufacturing company and need to see expenses according to when inventory was ordered, as opposed to waiting for when the net terms of an invoice are up and the invoice is finally paid. This can also help them plan for paying an expense in the upcoming weeks.
Secondly, the company may be seeking investors, and investors want to see continuity and consistency. Now consider the cash method. A company that uses the cash method can look at the books and easily see when cash went out of the account, just by looking at the profit and loss statement (which is where the expenses are shown).
Whichever method you use, online bookkeeping services such as Akuracy can ensure that your books are kept up to date and of course, accurate, so that you can have the cleanest presentation possible for making financial decisions for your business.
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But they can also see when they actually started to make money on the project they’ve been spending on, not when they theoretically have been earning the money. After all, let’s face it, most times the question being asked is not, when did I earn that money, but when did that deposit hit, right?
What further advantage is there to using the cash method in bookkeeping for general contractors? Consider this example.
Cash Accounting in Construction
Say 123-Construction just completed the drywall stage of a project. They bill their customer $5,000 due 30 days from the date of the invoice. Meanwhile, the contractor continues to record material costs every time they send out payment, either via check or electronically.
Under the cash method, they are not showing any income for the work that was done because no payment has been made to them. Only after they receive payment the following month can they say they made money on the project.
In addition, accurate books that are cash basis will easily allow you to see what you would be able to take small business tax deductions, and plan for tax season ahead of time for current and future years.
Yes, the cash method seems to be advantageous for showing when income is actually collected, as well as showing the effect the business dealing had on cash flow. In a small company, that is important to be able to see with ease, since cash may be tight, and you are always looking for how can you be more profitable. You want your financials to easily tell that story.