Manage Budgets and

Financial Plan with in the

project
 Accounting for Financial
resources in construction
 Construction Accounting Systems
Objective of this section is to discuss;
• differences between construction industry and
other industries and how construction
accounting system takes these differences into
account
• structure of construction financial statements
and different ledgers used by Construction
accounting System.
• the difference between cost reporting and cost
Control in construction
• How construction costs are tracked in
Construction industry.
 What makes construction operation different from
other operations like manufacturing?
Manufacturing (plastic factory) Construction

• Process oriented (similar products) •Project oriented (unique, limited time frame and budget)
• Operate at centralized •Decentralized production and site specific
location

• bills are paid at specified days •Usually long-term contracts with

or upon purchase progress based payments (retention..)

• Steps in manuf. Process wouldn’t • Heavy use of subcontractors

subcontracted in most cases

•easy to determine production cost •offer fixed price during bid on assumptions
(need to keep accurate cost for project)

frequent use of stock as an inventory •Low inventory

•standard products •Custom built products
 Cont’d
Construction accounting systems include
• Software (data and data operation system)
• Hardware and
• Personnel
Construction accounting system serves four
Purposes
• Processing Cash receipts (collecting payments) and disbursements (paying bills)
• Collecting and reporting data needed to prepare financial statements
• Collecting and reporting data needed to prepare income taxes, employment taxes
and other relevant documents
• Collects and provides the data needed to manage the finances of the company as a
whole, for each project and for each piece of heavy equipment used in the project.

Without the involvement of different actors ( including project manager)

achievement of the fourth purpose is very difficult. That comes out to be very
challenging during recording and organizing accounting data of various tasks that
involve in construction industry.
The accounting system should be able to provide data quickly and on time. if not, the
data remains to be of cost reporting type rather being cost control.

 Why do we need financial statements in construction?

 Concept of cost control can be applied when management is in a position to
compare resource (cost, Time) required to complete the project with available
budget at a point in time.

When estimated cost at completion has considerable

difference (exceeds/lowers) from the budget for a line
item, the project manager should investigate the
source of the overrun.
Common problem types to look for include;
• **Clerical errors (miscoded or incorrectly entered)
• Budgeting and estimating errors
• Unexpected conditions (weather)
• Poor execution of work (bad planning or poor
productivity)
Clerical errors can be reduced or even be eliminated if different informed actors
like accountants and project managers can cooperate on tracking and organizing
Data of construction company.
 Cost reporting Versus cost control
Cost reporting
is where the accounting system provides management with
accounting data after the opportunity has passed for the
management to respond to and correct the problems if it exist.
Cost control
is where the accounting system provides management with
accounting data in time for management to analyze the data and
make correction in timely manner.

Good financial management in Construction practice

should follow cost control approach. To provide accounting data in
time for management, the data should be tracked and collected at
the right time for all line items. Usually main categories in
Construction incorporates materials, labor, subcontractor,
equipments and others.
 When to track and provide accounting data to management for
control purpose in Construction Company .
• material purchase
The data should enter into the accounting system and provided for
management at various stage for reconciliation
*during receiving material,
*during processing payment and
*when and its required by other control body).
• Labor
*during entering employee Time on the right time,
* when time elapsed on tasks is required by project management for
evaluating employee performance.
• Equipment
*Entering time the machine elapsed on a task right on time.
*during allocating machine time to a project
* when data is required for machine performance evaluation
• Subcontractor
*When contract is entered
*When payments are processed and etc.
 Cont’d
• A good knowledge of Construction industry and line
items involved is important to properly organize data
generated from projects.
• In General the data collected by accounting
department is summarized weekly, monthly, quarterly or
annually so that the management will obtain it easily to
evaluate overall performance of the project through
various quantitative and qualitative techniques like
schedule performance and cost performance indexes.
• If accounting system is not able to facilitate conditions
for cost controlling then its benefit to construction
industry will be very much limited, since cost control
and frequent performance evaluation is mandatory for
project success in construction industry.
MATERIAL PURCHASE The point at
Purchase Order
Which data
preparing
are collected
.
Material purchase (credit based and reported to
purchase from supplier) management
PO approved

Materials PO Entered to acc.

ordered system

Materials Bill received

received

PO and received report matched to bill

Costs and NO PM approval

Quantity ok
yes
Process
Payment
PO (purchase order)
Final approval

Pay bill
Material purchase (cash based PO prepared
purchase.)
. Acc.
PO approved data

Materials PO Entered &

ordered Process payment
No/change
Costs, quality and orders
NO If ok
Quantity ok Cash paid; PM consent
Materials ok
received

Matching of PO, received report and payment ;

hold accountable
Recording in respective unit

Holding involved parties

accountable should
Exist at all stages
Labor cost tracking

Time record /card

prepared

Field approval

Process time
record/card

PM approval

Entering into Acc.

system Update costs
Employee paid

Cost of completion Hold accountable

Is updated here
Subcontracts possible
Processing Contract Approval

Contract Contract
Issued to sub .contr entered
Acc.
System
Contract
involvement
signed

Work
performed

Bill
received

Project management approval

Process payment

Pay Bill
Equipment cost
tracking Time recording
/ card
prepared

Field approval

Process time
card

PM approval

Equipment costs are Update costs

Assigned to job

Updating cost Hold accountable

Required for completion
 If the ACC. system is to be in line with cost control
approach it must have the following key components
• Strong job cost and equipment tracking system (general ledger,
job cost ledger and equipment ledger.)
* update & report costs including committed costs & estimated cost at
completion
• Must utilize the principles of management by exception that
can easily identify areas of concern. If not, there is a possibility
of being get lost in the volumes of data generated from the
accounting system.
• Clear Polices and Procedures including limits for purchasing,
must be established on various finance related activities to
ensure that things don’t fall through the cracks and to handle
financial issues in a consistent manner.
• Data must be easily and quickly available to management and
other relevant employees who are directly responsible to
various tasks from which cost data are generated.
 Construction accounting system Ledgers
• The general ledger
tracks financial data for the entire company
(multiple projects) and is used to prepare the
company’s financial statement and income
statement. The general ledger is Common for
industries other than construction too.
• The Job cost ledger
is used to track the financial data for each of the
construction projects and is in more detailed
form than general ledger (see formats)
• The equipment ledger
is used to track the financial data for heavy
equipment and vehicles (applicable especially in
companies with lots of heavy equipments)
 The general Ledger
• Consists of all the accounts necessary to track
the financial data needed to prepare the
balance sheet, income statement and income
taxes.
• A chart of accounts lists all of the account in the
general ledger
• The accounts on the chart of accounts appear
in the order they appear in the balance sheet
and income statement
 See chart of accounts in construction used for
general ledger
Methods of accounting in Construction
Companies

The way transactions are handled in the general

ledger is based on the accounting method used
by the construction company
The following accounting methods are Available
for construction industry
• Cash
• Accrual
• Percentage of completion
• Completed contract
 Methods of Accounting
• Cash
revenue is recognized when payment is received and expense when bills are
paid. Cash and accrual are widely used in many industries
• Accrual
revenue is recognized when the company has the right to receive and
expenses when the company is obligated to pay. Retention not recognized
(deferred) until the company has the right to receive
• Percentage of completion (appropriate for long term contracts> 1 year)
revenue, expenses, and estimated profits on construction projects are
recognized through the course of the project. Retention is also recognized
as revenue. Estimated profits are equally distributed over the entire project.
revenue ,expenses and estimated profits are calculated based on the %age
of the project that is complete. Percentage of completion is considered as
the most appropriate method for construction companies.
• Completed Contract.
both revenue and expense are recognized at the completion

What ever method is used, the preparation of financial statements is

mandatory to explain financial status of the company
 Cont’d
• To get the best picture of a company’s financial health, a construction
company should use the method that best matches its costs to its
revenues and profits.
• For most general contractors this is the percentage of completion
method. The outcome of the construction contract can be estimated
reliably. Contract revenue and contract costs associated with the
construction contract shall be recognized as revenue and expenses
respectively by the referring to the stage of completion of the contract
activity. Practically, in Financial Management of Construction contracts
percentage of completion is devised as a measure which works as a
base for all estimations and variations
To use percentage of completion accounting method
project completion cost and its total profit must be set first.
costs must be tracked along the course of the project properly
(example....) (why do contractors over/under bill)
• For smaller construction companies the added cost and complexity of
using the percentage of completion method may not be warranted and
the company may use the cash or other preferred method.
Some case why percentage of completion is preferred
• A company that is recording material, labor and
subcontractor costs through out the month and not billing
the owner until the firs week of the following month will have
an understated profit at the end of the month, because the
company is underbilled. It may take advantage its financial
position when the need arise (loan and the like)
• Contractors who front- load a project (raise prices in the
early part of the project and lower prices latter) are receiving
prices early in the job for work they have not yet completed
because the company overbilled the client .
To adjust for these situations and get an accurate picture of
a company’s finances the financial statements must take
into account over and underbillings.
 The Job cost Ledger
For management to monitor and control the cost of
construction project
• The costs for each project including activities must be
tracked against the budget allocated during planning
• The costs recorded to the job cost ledger, becomes
part of company’s historical records to use it for future
estimation for projects and activities having close
characteristics
Although construction costs are recorded in the
general ledger, the general ledger lacks the necessary
details to meet the above two requirements.
Time and budget setup in a project
 Cost information cycle (The Job Cost Ledger) tracks cost for each project including
some details and also becomes companies historical records. These Historical
records are used to prepare estimates and bids, which are the basis for the
budgets used in the job cost ledger

. Historical
records Estimates
and bids

Actual
costs
Budgets
 Breakdown of Job cost ledger
Job cost Ledger—Job (project)----phase---
---------- Material
---cost code- .......... Subcontractor
---------- Labor
....... Equipment
.......... Other
# # # - # # - # # # # #A (a complete cost code)
102-01-07200L (for both manual & computer use)
Letter A can be M,L,S,E,O
( material, labor, subcontractor, equipment, other)
The system must be standardized, all involved users
must use similar codes to come up with consistent usage
Must be simple
A hard to follow coding will create confusion
 The equipment ledger
Many construction companies have major investments in equipments
that are moved from job to job. some equipments, like dump truck, for
instance, may be on multiple jobs during one day. Proper tracking is important
to ensure that; (avoid cost shifting which assigns equipment cost from
unprofitable job to profitable one)
• costs are recorded on the right project
• investment on the equipment is generating the required return.
The equipment ledger serves these purposes.
Equipment ledger
--Equipment type —Descriptions (1)-------------------------Des(2)

• Rent and lease payments

Depreciation • repairs
Repairs and maintenance maintenance
Equipment Fuel and lubrication •Tyres
Taxes, license, and insurance
Equipment costs allocated to job
• Equipment costs allocated to employee
Financial Statements and items incorporated in F.
statements of Construction company
Balance Sheet
• Is snapshot of companies financial assets, liabilities and owners equity at a
specific point in time
• Commonly prepared at the end of each month and at the end of fiscal year
Items in Balance sheet ( involves Assets, liabilities, owners equity)
Assets; Current assets
Fixed assets
Prior Acc. period
Liability; Short term liability Initial investment Profits retained
long Term liability
Owners equity;
For corporation (capital stock, retained earnings & Current period
net income)
For Partnership (Listed for each partner separately)
For sole proprietor (listed as a single sum as owner capital)
 Assets
Assets---those resources held by the company that will
probably lead to some future cash inflows by selling or
using it to produce something of value( Assets =
liabilities+ owners equity)
Current assets
• Cash-----petty cash, demand deposits, time deposits
( certificate of deposit) with maturity of a year or less.
• Account receivable-----invoices owed to the company
that will likely to be paid within one year. (retention and
trade)
• Inventory------materials to be incorporated in construction
projects within the next year. in general, construction
company has little or no inventory
 Cont’d
• Underbillings
used by companies that use percentage of completion accounting
method
• Notes receivable
all invoices due to company to be paid within one year and have been
formalized by written promise to pay (short term loans provided, advances
to employees)
• Prepaid expenses
• Less Doubtful accounts (contra account for likely doubtful accounts)
Fixed Assets
• Land
• Buildings (all real state owned by the company)
• Equipments (excavators, dump trucks, Compressors, mixers, vibrators)
• Trucks
• Autos
• Office equipments (desks , Computers & etc)
• Accumulated Depreciation (the loss in Value to date of fixed assets) .
This account is known as contra account and it reduces initial fixed asset
value to net fixed asset at point in time
 Liabilities
Current Liability
expenses paid for future supplies and services
• Accounts payable
debts that the company owes (be financially in debt) and expects to pay within one
year but not evidenced by written promise
• Current portion of long term debt
• overbillings
• Notes payable
debts to be paid within one year and formalized by written promise
• Accrued payable
Accrued payable are monies owed for supplies and services that have not been
billed. (accrued taxes, accrued salaries, Accrued vacation)
• Capital lease payable (Current portion)
• Warranty reserves (Funds set aside to cover the foreseeable cost of warranty work)
Long Term liabilities
• long term debts
Total liability= Current L. + long L.
 Cont’d

• Owners equity---claim of the company’s owner

or shareholders on the assets that remain after
liabilities are paid.
For corporation owners equity is often broken
down into; (capital stock, retained earnings, and
current period net income) capital stock is initial
investment by shareholders
For sole proprietors, owners equity is listed as a
single sum and known as owner’s capital
For partnerships, the owner’s equity is listed for
each partner separately and is known as
owner’s capital
 The income statement
Revenues;
is the income recognized from the completion of part or
all of a construction project. For a company using the
percentage-of- completion or accrual accounting
method, revenue is recognized at the time the project’s
owner is billed for the work. In addition, Overbilling are
subtracted and underbillings are added from and on
revenue respectively with company’s that use %age of
completion accounting method. similarly, cash and
completed contract method have their own respective
approach as discussed on the previous slides.
Construction costs
• Materials
• Labor
• Subcontract
• Equipment (in some cases divided into rented &owned)
• Other
 Cont’d

Equipment Costs
• Rent and lease payment
• Depreciation
• Repairs and maintenance
• Fuel and lubrication
• Taxes, license and insurance
• Equipment costs charged to jobs (Contra account to
offset the cost categories in the equipment section of the
income statement)
• Equipment costs charged to employees (employees are
charged for personal use of company vehicles or the
company must include the value of the employees’ use
of the company vehicles as a taxable benefit in the
employees’ benefit package (contra account)
 Cont’d

Gross profit
revenue less construction costs
 Overhead costs
those costs that can not be charged to specific
construction project
Net profit from operations
other income and expenses
like income obtained in other investments, sale of assets
profit before Taxes
income tax
Profit After Tax
 Equipment costs
• When equipment is used on multiple construction projects the
allocation of equipment costs to construction job is much more
complicated than the billing of materials, labor and
subcontractor services. when equipment is used on a single
construction project, all costs go to that project
• The equipment cost portion of the income statement is a unique
feature of income statements for construction companies that
own their own equipment. The following example shows how
equipment can be allocated to different projects in a company.
• Example suppose the construction company that had a front-
end loader whose costs of depreciation, taxes, licenses, and
insurances were $3200 per month and whose preventive
maintenance, fuel, and lubrication were $35 per billable hour.
During the month of April the tires were replaced at a cost of
$6000. No other costs were incurred during the year. The
loader was only used during the months of April through
October. Then how do we allocate costs to the jobs (projects)?
The monthly costs and billable hours by jobs are shown on the
next slide
Month Monthly Hourly Tires Billable hours by Average allocated Balancing
cost cost job hour cost By end of M
(fixed) (varia.)
January 3,200 0 0 0 ? -3200
February 3,200 0 0 0 ? -6400
March 3,200 0 0 0 ? -9600
April 3,200 2,800 6,000 80 hr on job 101 150.00 6282.4 (-9600-
(35x80) (12000/80) 80hx78.53b 12000)+6282
r/h =-15317.6
May 3,200 6,300 0 80 hr on job101 52.78 6282.4(101) -10682
(35x180) 100 hr on job 102 (9500/180) 7853 (102)
June 3,200 6,300 0 180 hr on job 102 52.78 14135. -6047
(102)
July 3,200 6,300 0 180 hr on job 102 52.78 14135 -1412
August 3,200 6,300 0 180 hr on job 102 52.78 “ +3223
September 3,200 6,300 0 180 hr on job 102 52.78 “ +7858
October 3,200 1,400 0 40 hr on job 102 115.00 3141.2 +6399
(4600/40) (102)
November 3,200 0 0 0 ? +3200
December 3,200 0 0 0 ? 0

1020 is total hour the machine operated

Actual cost per billable hour [(3200x12)/1020] +(6000/1020)+35 birr/hr= 78.53birr/hr
then for month April and to job 101 allocated cost is 78.53 birrx80hr=6282
Month Monthly Hourly Tires Billable hours by Average allocated Balancing
cost cost job hour cost By end of M
(fixed) (varia.)
January 3,200 0 0 0 ? -3200
February 3,200 0 0 0 ? -6400
March 3,200 0 0 0 ? -9600
April 3,200 2,800 6,000 80 hr on job 101 150.00 6400 -15200
(35x80) (12000/80) 80hx80br/h
May 3,200 6,300 0 80 hr on job101 52.78 6400 (101) -10300
(35x180) 100 hr on job 102 (9500/180) 8000 (102)
June 3,200 6,300 0 180 hr on job 102 52.78 14400(102) -5400
July 3,200 6,300 0 180 hr on job 102 52.78 14400 -500
August 3,200 6,300 0 180 hr on job 102 52.78 “ +4400
September 3,200 6,300 0 180 hr on job 102 52.78 “ +9300
October 3,200 1,400 0 40 hr on job 102 115.00 3200 (102) +7900
(4600/40)
November 3,200 0 0 0 ? +4700
December 3,200 0 0 0 ? +1500

If it was forecasted that hourly cost for loader is 80/hr for considered operation year. 1020 is total hour the
machine operated then considering 80 birr/hr the allocation is shown in the following manner.
For month April and to job 101 allocated cost is 80birrx80hr=6400 (adding for whole year ;all costs
fixed+variable= total costs allocated ----- the difference 1500 is that of taking 80 (forecasted) instead of 78.53
the actual value.
 Cont’d
• Some companies and accountants require that all of the
equipment costs be allocated by the end of the company’s
fiscal year to reduce complexity of analysis
• In another case, whenever financial statements are required
at one point in time before the end of fiscal year, the
forecasted hourly cost of the equipment is important and
sufficient for the purpose.
• Forecasting, hourly cost requires educated judgment on
variable and fixed components of the costs. The planned
(estimated) total hour the machine will operate for the fiscal
year is also required. If that is obtained job cost part of a
given equipment can easily be allocated. Then , that will
create convenience for constructing financial statements.
• After using the above mentioned method to obtain required
financial statements for some point in time, final and actual
(for fiscal year) adjustments can be made at the end of the
fiscal year to prepare year end financial statements.
 Tracking and recording General Overhead costs
General overhead cost consists of those costs that can’t be
specifically identified to the completion of a construction project.
it includes main office and supervisory costs. G.O costs are
controlled on a companywide basis
Reason for Tracking and recording G.O costs
• Significant amount of cost goes to G.O (G.O cost of 10 to 25%
of revenue is common in construction industry which is much
greater than profit. in most cases profit is not >5% of revenue)
• It is easy for company to squander its profit by failing to control
G.O costs

Differentiate between general overhead and project overhead

• project overhead (indirect cost of project/ indirect cost/ direct overhead cost)
costs are; costs that can be specifically identified to the completion of
specific construction project, but can not be identified with the completion of
specific construction component on that project.
The following are among items included under General Overhead.
• Advertising,
• Bad debts (writing off bad debts),
• Bank fees,
• Car and truck expenses (associated with Office and general management
personnel),
• Charitable contribution,
• Computer and office furniture (costs associated with lease or purchase),
• Depreciation (approaches for profit projection and company Cash
requirement),
• Dues and membership,
• Employee wages and salaries (related to main office),
• Employee benefits,
• Employee retirement; (to office and general ,management),
• Employee recruiting (advertising),
• Employee Training,
• Employee Taxes,
• Insurance,
• Interest expenses,
• Janitorial and cleaning,
•
• Legal and professional services,
• Meals and entertainment,
• Office supplies (consumable supplies for main office),
• Office purchase (loan payment of office purchased),
• Office rent,
• Office Utilities (water, sewer, natural gas, electricity & etc),
• Postage and delivery,
• Promotion (hats, shirts & etc),
• Repairs and maintenance (for office utilities),
• Taxes and licenses Telephone,
• Travel,
• Unallocated labor,
• Unallocated Materials (items bought for construction project
but aren’t billable to the project. These includes inventory
shrinkage), Miscellaneous (all costs not included elsewhere)
 Cont’d

How do we allocate G.O to a project when

company runs different projects with the
same general overhead?
Options available are;
• Based on revenue Generated,
• Labor costs used by project,
• Material costs used by project and
• usage of general office support
(judgmental).
 Accounting Transactions
Objective
• To understand how common Liability
transactions affect the different Asset
ledgers and how the ledgers are +Equity
interrelated
These transactions are referred to
as Journal eateries
Debit increases the balance of asset
Increase DEBIT CREDIT
Accounts and decreases the balance
of liability and owners equity

Credit functions in the opposite way Decrease CREDIT DEBIT

 Examples (Invoice Charged to a Job
”project” without retention)
Construct a balance sheet and income statement of your own and determine
changes in these financial statements and on job cost ledger due to some
transactions in the construction company.
1).$10,000 material invoice sent to your company charged to
lumber on phase 1 of project 110 is entered into ACC system
• Balance sheet
*account payable trade.... 10,000
*Current period net income -10,000
• Income statement
*Materials............................+10,000
*Profit..................................-10,000
• Job cost ledger
*110-01-06120M...............+10000
+(increase)
-(decrease)
 Invoice charged to a Job “Project” with
Retention held from contractor
2) $10,000 subcontractor’s invoice is received for plumbing
on phase 1 of the same project. When paying the bill the
contractor will withhold 10% ($1000) retention.
Balance sheet
310 Account payable-trade........... +9000
311 Account payable -retention.....+1000
430 Current period net income......-10,000
Income statement
630 Subcontract.............................+10,000
Profit................................................-10,000
Job cost ledger
110-01-15100S ...............................+10,000
 Paying invoices
3) Invoices in example 1 & 2 are paid (retention
will not be released at this time)
Solution
The contractor will use a check drawn against the
cash account for example 1***10,000 and for Ex
2** 9000 for a total of $19000
Balance sheet
110 cash...............................-19000
310 account payable trade....-19000
 Labor charged to a job “project”
3. Finishing carpenter time entered into ACC system with the following data on the
same project (110)
Weekly payment....................... .............................................................birr 895.90
The employee has the following withheld from
his/her check
Costs (F. social security tax (55.55), F. Medicare
(12.99), withholding tax Federal, Regional state
(75.25,33.86), health insurance employee part(76.08)
Total withheld ............................................................................................birr 253.73
The employer has the following burden costs related to the above
employee
(social security(55.55),Medicare (12.99),FUTA (7.17),RSUT(26.88),liability
insurance(8.96),workers’ compensation insurance(71.67),health insurance premium
(24.00),amount set aside for vacation(38.00)
Payable to regional state (Total) 26.88+33.86..................................................birr 60.74
Payable to federal (Total from employer and employee)
55.55+12.99+7.17+55.55+12.99+75.25..................................... birr 219.50

Payable, Total health insurance (employer+employee)24+76.08............... birr100.08

*Federal unemployment Tax
*regional unemployment tax
 Cont’d

Payable to employee (net)

(895.90- 253.73)................birr 642.17

Payable,totalTax...
(60.74+219.50).....................birr 280.84
Payable total accrued insurance,
(8.96+71.67+100.08).........birr 180.71
Payable (set aside for Vacation)
...........birr 38.0
Total 1141.12
 Cont’d
Balance Sheet
340 accrued payroll........................ +642.17
342 Accrued Taxes.......................... +280.24
343Accrued insurance..................... +180.71
344 Accrued Vacation...................... +38
430 Current period net income......... -1141.12
Income Statement
620 labor.............................................. +1141.12
Profit.................................................... -1141.12
Job cost ledger
110-01-06210L..................................... +1141.12
When the whole amount is paid the change in the balance sheet is on 110
cash.................................................. -1141.12
If only employee is paid the change is only on (340) accrued pay roll
i.e, 110 cash............................................... -642.17
340 accrued payroll----------------------- -642.17
All items in the balance sheet liability portion shown above will reduce
by corresponding figure (-)
Items in the income statement and Job cost ledger will remain the same
 Cont’d
Paying pay roll Taxes
The amount is 219.50
Balance sheet
110 cash.................... -219.50
342 Accrued taxes..... -219.50
Paying for benefits
When the employee time was entered into the accounting system, funds were
set aside to pay the health insurance premium but the premium has yet to be
paid. When company pays for benefit, such as health insurance, it affects
the balance sheet. Cash is used to pay these accrued liabilities.
Determine changes that occur when monthly health insurance premium for
the above employee is paid every month (4.3333weeks)
From example the company owes 100.08 per week. The monthly premium
is 433.68 (100.08x4.3333). Each month the contractor will use a check
drawn against cash account to pay the health insurance premium. The
health insurance premium includes that of all employees but in this case we
are considering the above example.
Balance Sheet
110 Cash.............................. -433.68 (credit)
343 accrued insurance......... -433.68 (debit)
 Vacation time to jobsite employee
Vacation Time for Jobsite Employee When the employee’s time
was entered into the ACC system, funds were set aside to pay
for employee’s vacation time. This was done because it would
be unfair to charge all employee’s vacation to the job he or she
is working on when his or her vacation was taken.
For example, if an employee worked on a job for one day then
took a week’s vacation and returned to the job for one day, it
would distort the project cost to charge the job for seven days
of work when only two days of work had been performed. In
order to come up with a better approach when a jobsite
employee takes vacation, the employer pays him or her for not
working. The cost of this time is paid from funds set aside and
charged to the jobs the employee worked on throughout the
year. when the employee is paid for vacation time it affects the
balance sheet. No costs are incurred because the company has
been accruing these costs throughout the year. As a result no
changes occur in the income statement in job cost ledger.
 Cont’d
• On the balance sheet the employee costs become an
accrued liability, the same as they did when we
looked at labor charged to Job. This increase in
liability on the balance sheet is offset by an equivalent
reduction in accrued liability in the form of accrued
vacation. For the previous example, the company
would have an increase in liability recorded in the 340
(accrued payroll) 342(accrued taxes),343(accrued
insurance accounts which would be offset by reduction
in liability in the 344(accrued Vacation) Account. By
increasing some liability accounts while decreasing
another liability account by the same amount the
relationship between assets and liabilities on the
balance sheet is maintained.
 Cont’d
Determine the change in the balance
sheet when employee is paid for one
week’s vacation time ( this is paid from set
aside accrued vacation)
Balance sheet
340 accrued payroll.........+642.17
342 accrued taxes...........+280.24
343 accrued insurance....+180.71
344 accrued vacation.......-1103.12 (1141.12-38)
 Labor charged to general
Overhead
• When an employee’s-whose costs are to be
charged to general overhead- time is entered
into the accounting system it affects the income
statement and balance sheet. Because the
employee’s time is not charged to a job it doesn’t
affect the job cost ledger. On the income
statement all employee costs including labor
burden, are recorded as a cost in the general
overhead section of income statement
depending on the type of cost (from 820----830
on general cost ledger)
 Example related to overhead

• Assuming an estimator in the company is

paid equal amount to the previous
finishing carpenter all other expenses
including taxes are similar, determine the
change in the balance sheet, income
statement and job cost ledger.
• The changes are similar to the previous
changes with some changes due to the
fact that it is overhead
 Cont’d
Balance Sheet
340 accrued payroll........................ +642.17
342 Accrued Taxes.......................... +280.24
343Accrued insurance..................... +180.71
344 Accrued Vacation...................... +38
430 Current period net income......... -1141.12
Income Statement
820 wages and salaries...........................+895.90
821 employee benefits.............................+62(24+38)
825 employee taxes..................................+102.59()
830 insurance............................................+ 80.63
(8.96+71.67)
Profit.................................................... -1141.12
 Recording office rent
Renting office for general office (space that can’t be charged to a Job)
When the bill entered in to ACC. system it affects the income statement
and the balance sheet not the cost ledger.

The rent is recorded in the income statement as a general overhead

expense(842 in the office rent account for our example). The increase
in general overhead cost decreases the profit on the income statement
by the amount of invoice. On the balance sheet it is recorded as an
account payable-trade in the liability section. This increase in liability
resulted in the reduction in the current period net income

The reduction in profit in the income statement is equal to reduction in

current period net income on the balance sheet. because the cost is
part of general overhead and is not charged to Job.
 Solution
Ex. Determine change to B. sheet and income stat.
if 2000 invoice for office rent for general use is
received
Solution
Balance sheet
310 account payable trade.......... +2000
430 current period net income..... -2000
Income statement
842 office rent............................... +2000
Profit.............................................. -2000
 Recording office depreciation (own office)
• In this case also you can’t bill the cost of the office to the job, the company
needs to record the loss in value or depreciation each month
• On the income statement the depreciation is recorded as a general
overhead expense (819 depreciation account)
• This increase in general overhead decreases profit
• On the balance sheet depreciation is recorded in the less accumulated
depreciation contra account in the asset section, which is used to offset the
value of the fixed assets. This decrease in assets result in current assets net
income. depreciation does not affect job cost ledger
• Determine change for 2000 office depreciation on own building
Balance sheet
250 less accu. depreciation........................................+2000(credit)
430 current period net income.................................... -2000 (debit)
Income statement
819 depreciation .........................................................+ 2000
Profit .............................................................................-2000
 Recording general Overhead
invoices
• The effect on balance sheet and income
statement is similar to rent office
Example
500 birr Telephone invoice received
Balance sheet
310 account payable trade..................+500
430 current period net income............. -500
Income statement
846 Telephone......................................+500
Profit.......................................................-500
 Billing a client
• In previous cases we looked at how invoices and labor affected the
accounting system. Now it is time to bill a client for these costs.
When the company bills a client for work performed it affects the
income statement, balance sheet and the job cost ledger.
Example determine the change to the balance sheet, income
statement and Job cost ledger of a 100,000 bill to client for previous
Job. The client holds 10% retention
Balance sheet
120 account receivable trade.................+90000
121 account receivable-retention...........+10000
430 current period net income................+10,000
Income statement
500 revenue ............................................+100,000
Profit......................................................... +100,000
Job cost ledger
120 revenue............................................. + 100,000
 Cont’d
• Billing for retention
Contractor has completed a construction project on which the client
is holding 10,000.Determine changes
Balance sheet
120Account receivable-Trade..........+10,000
121Account receivable retention..... -10,000
No change on income statement
• Receiving payment from client
If the payment of 90000 on preceding slide is received (receivable is
changed to cash)
Balance sheet
110 Cash ................................................................+90,000 (debit)
120 account receivable -trade.................................. -90,000(credit)
 Cont’d
• Purchase of equipment with a loan
When the company obtains a new asset with a new liability, the
purchase of an asset affects only the balance sheet. On the
balance sheet the cash account is decreased by any down
payment the contractor makes. The asset purchased is
recorded as long term asset in the asset section of the balance
sheet. The loan is recorded as long term liability. If the prepaid
interest is included in the loan down payment, it has to be
amortized over the life of the loan. The net increase in the
assets is offset by an equally large increase in the net liabilities
Ex. determine change on b. sheet when contractor purchases a
$120,000 hydraulic excavator with 110,000 loan and a 10,000
cash
Balance sheet
110 cash.............................................. -10,000 Credit
220 construction equipment.................+120,000 debit
380 long term liability............................+ 110,000 credit
 Cont’d

• Loan Payment
Determine the changes when contractor makes the first
payment for excavator (here the company is using cash
to reduce loan principal not from operation). The amount
of the payment is 2230.40 which includes 1497.10 and
733.33
Balance sheet
110 cash.....................................-2230.40
380 long-term liability.................-1497.07
430 current period net income......-733.33
Income statement
881 interest expense.................... +733.33
Profit............................................. -733.33
 Cont’d

Equipment depreciation
• Determine the change to B.sh, In.St and equipment
ledger for one months depreciation. Monthly depreciation
is 2000
Balance sheet
250 less ACCU. depre..................+2000 (cr)
430 current period net income..... -2000 (de)
Income statement
720 depreciation............................+2000
Profit...............................................-2000
Equipment ledger
Excavator 1-depreciation.............. +2000
 Cont’d
Leased equipment
Determine the change on---- for one month’s rent of an
excavator . Rent amount 2500 per month. The machine
is used on multiple jobs
Balance sheet
310 Accounts Payable Trade..........+2500
430 Current period net income........-2500
Income statement
710 rent and lease payment............+2500
Profit.................................................-2500
Equipment ledger
Excavator 2-rent and lease payment...+2500
 Cont’d
• Leased Equipment with capital lease
(capital lease is treated like loan)
Determine changes when contractor leases a front- loader.
The lease is considered capital lease with present value of
120,000
Capital leases are non-cancelable leases that meets at least
one of the following( lease extends for>=75% equipments
useful life, ownership transfers at the end of the lease,
ownership transfer at the end of lease through purchase
option with heavily discounted price, Present Value of
lease payment at market interest rate is>90% fair market
value of the equipment
Balance sheet
260 capital leases..............+120,000
350 capital lease payable...+120,000
 Cont’d

Lease payments on capital lease

The contractor makes the first payment. Amount is 2433.17
of which 1633.17 is used to reduce capital lease payable
and 800 is interest on liability
Balance sheet
110 cash.....................................-2433.17
350 capital lease payable...........-1633.17
430 current period net income....-800.00
Income statement
881 interest expense..................+800.
Profit ..........................................-800
 Amortization of capital lease
Determine the change to the balance sheet and income
statement and equipment ledger for one month’s
amortization with monthly amort. Of 2000.( amortization
reduces the capital leases asset on the balance sheet. The
amortization behaves much the same as depreciation) on
the income statement amort. Is recorded as equipment
lease costs or put in rent and lease payments.
Balance sheet
260 capital leases.............................-2,000
430 current period net income..........-2,000
Income statement
710 rent and lease payment.............+2,000
profit..................................................-2,000
Equipment Ledger
Loader 1-rent and lease payments...+2,000
 Invoice for equipment repairs

Determine the change to the Ba. sheet income statement,

the equipment ledger of 500 invoice for repair to the
above loader
Balance sheet
310 accounts payable-trade.............+500
430 current period net income..........-500
Income statement
730 repairs.......................................+500
profit.................................................-500
Equipment ledger
loader 1-repairs and maintenance...+500
 Equipment charged to Job
Determine the change to the inco. Stat ,Job cost ledger and
the equipment ledger of a 5000 equipment charge to the job
101 cost code 02100 grading and excavation
The goal at the end of fiscal year for all equipment costs to
be charged to individual jobs or employees. equipments
charge may be made to jobs based on the number of hours
a piece of equipment was operated on a job or based on the
number of days the equip. was on a job, whether or not it
was operating. Often time card is kept
Income statement
640 equipment....................................+5,000
799 equipment cost charged to jobs...+5,000
Job cost ledger
101.01.02100E....................................+5,000
Equipment ledger
Excavator 2-eqiupment cost allocated..+5,000
 Equipment charged to employee
Determine the change to the B.sheet,income
statement and equipment ledger of a 50birr
deduc- tion from an employee’s wages for
personal use of a company Vehicle
Balance sheet
340 accrued payroll........................................-50
430 current period income.............................+50
Income statement
798 equipment costs charged to employees..+50
profit ...............................................................+50
Equipment ledger
Truck 5-equipment cost allocated ..................+50
 Sale of equipment
Determine the change to the balance sheet and income
statement of the sale of the crane that was sold for 60,000
cash. The crane was purchased for 120,000 and 62,000
depreciation has been taken
When asset is sold , The asset is removed from the fixed asset
account and its depreciation is removed from accumulated
depreciation account. The sale of asset increases cash, note
receivable or other assets account depending on sales term.
The gain or loss is also recorded on current period net income.
The book Value 57,600 (120,000-62400). Gain is 2400 (60’-57.6’)
Balance sheet
110 cash.....................................+60,000 (debit)
220 construction equipment........-120,000 (credit)
250 less acc depreciation............ -62,400 (debit)
430 current period net income....+2,400 ( credit)
Income statement
910 other income.........................+2,400
profit.............................................+2,400
 Purchase of inventory
Determine change if inventory of 5000birr of
copper wiring purchased on credit. The
wire will be used on future projects
Balance sheet
130 inventory.............................+5,000
310 accounts payable trade.......+5,000
 Charging inventory to a Job

Determine the change when inventory of 2000 copper wire

is billed from inventory to job number 101 for use in
phase 2. the wire is cost coded to 16100
Balance sheet
130 inventory.........................................-2,000
430 current period net income...............-2,000
Income statement
610 materials.........................................+2,000
profit........................................................-2,000
Job cost ledger
101.01.16100M......................................+2,000
 Recording changes in costs and profits in excess of
billings (underbillings)
At the end of last month the company’s underbilling was 10,000.
At the end of this month it was15,000
Determine the change in balance sheet and income statement
when this change is recorded. The change in underbilling is
15000-10000=5000 this is for companies that uses %age of
completion accounting method.
when the company (that use %age of compl. accounting method)
has costs and profits In excess of billings, it has underbilled the
revenue on its construction projects
Balance sheet
140 costs and profits in excess of billings....+5,000
430 current period net income......................+5,000
Income statement
500 revenue..................................................+5,000
profit .............................................................+5,000
 Recording changes in billings in excess of cost
and profit (overbillings)
Overbilling at the end of last month was 10,000.At the end of
this month it was 11500 determine changes in .. (the
overbillings should not be recognized as profits, yet the
company has done so when it billed its projects. To correct
this situation, the company must reduce its revenue by the
overbilled amount. This decrease in revenue decreases
company profit, The company also owes its clients for the
work it has billed for but has yet to perform, which creates
liability record. That also creates reduction in current period
net income.
Balance sheet
320 billings in excess of costs and profits...+1,500
430 current period net income...................-1,500
Income statement
500 revenue................................................-1,500
profit............................................................-1,500
 More construction Accounting
Committed costs and estimated cost at
Completion
• To get more accurate picture of a construction
project’s financial status, unbilled committed costs
must be included with the invoiced costs in the job
costs ledger, and the estimated cost at completion
needs to be projected.
• some accounting systems allow you to track others
don’t. in the case where it does not ,costs must be
manually combined with the job cost ledger to get an
accurate picture of the project’s financial status. The
following worksheet will help in tracking committed
costs
• Cost overrun and cost underrun can easily tracked so
that appropriate measures can be taken if deemed
necessary
 worksheet to track committed costs

A B C D E F G H I G K L

Code Desc Origi Chan Total Com Com Non- Total Cost Total Varia
riptio nal ge estim mitte mitte com com to estim nce
n estim order ates d d mitte mitte comp ated over/
ate s costs costs d d and lete cost (und
invoi costs non at er)
ced invoi com comp K-E
ced mitte letion
d I+J
costs
C+D F+H
 Overbillings and underbillings
Purpose
• A company that is recording material, labor and
subcontractor costs through out the month and not billing
the owner until the firs week of the following month will have
an understated profit at the end of the month, because the
company is underbilled.
• Contractors who front- load a project (raise prices in the
early part of the project and lower prices latter) are receiving
prices early in the job for work they have not yet completed.
To adjust for these situations and get an accurate picture of a
company’s finances the financial statements must take into
account over and underbillings.
 Cont’d

• Appropriate Profit estimation during the bid

for contract work
• Proper tracking and recording of actual
cost committed to date are among the
important consideration for successful
utilization of percentage age of completion
accounting method.
 Underbillings & Overbillings worksheet

A B C D E F G H I J K L

Job # Job Current Total Estim Actu Earned Costs Total Under Over %age
(proje name contract estimat ated al profit & billed billing billin comple
ct) amount ed cost profit cost ExF earne s gs te
at (C-D) s to D d (H-I) (I-H) Fx100
complet date profit D
ion (F+G)

3
 Internal controls
• When setting an accounting system it is important to set up
internal controls to protect the company against internal theft
and misappropriation of financial resources. Each year many
companies run into financial difficulties-some even ending up in
bankruptcy- because a trusted employee is misappropriating
financial resources.
When setting up internal control, the company should seek the
help of professionals like Certified public accountant

The following are some of key principles to keep in mind when

setting up internal controls
• Separation of duties (attempt to reduce collaboration ------
increase involved bodies in a process depending on the weight
of activities financially)
• Maintain proper paper trial so that it is difficult to hide a theft by
not documenting transactions (pre-numbering documents,
checks, proper documents for received payments and etc)
 Cont’d

• Review of accounting documents by owner, manager or

appropriate person
• All assets should be tracked and accounted (inventory).
• Regularly and consistently perform all accounting
functions
• Limit access to accounting information and
documentation to those employees who need it to
perform their job function
Limit types can be among the followings computerized
systems are used (view only, view and cross check, view
and correct if necessary and etc.)
 Computerized accounting system
Computerized accounting systems play significant role in
construction accounting. There are many accounting system
that has been developed for construction industry. These
systems are often sold in modules or pieces. A company can
purchase the one best fits its purpose
When looking into computerized accounting system one should
take the following into account
• Reliability (accounting system with performance history. There
is always a risk in being the first to try the system)
• Cost (purchase, training, upgrading, setup costs and etc)
• Training and technical support
• Ease of use
• System protection (multiple levels of password protection)
• Integration of modules (like billing what employee has done,
paying employee and trucking employee job)
• Backup and recovery procedures (in the event of virus,
hardware failure &etc)
• Customization (the ease of adoptability for any required
change)