Accounting for Construction Industry
Construction industry involves the construction of buildings and real estate properties for trading purpose. It also includes alterations and repairing the post construction period.
Accounting for construction industry could be a bit different as compared to any other industry. It involves long term work in progress, labour charges on a daily basis, regular flow of raw materials, etc. However, with the help of some basic knowledge of the processes, the headache of it can be cut out.
Charts Of Accounts For Construction
Charts of Accounts does not differ as for construction industry. It may include or eliminate some of the accounts as per the requirements of the business. The following charts are to be prepared while doing accounting for the construction industry.
On the assets side:
- Current Asset
- Short Term Investments
- Allowance For Doubtful Debts
- Other Current Assets
- Investments And Other Assets
- Property Plant And Equipment
- Accumulated Depreciation
On the liabilities side:
- Non-Current Liabilities
- Tax Payables
- Account Payables
- Current Liabilities
- Deferred Income
- Accrued Interest Payable
- Notes Payable
Modes Of Accounting For Construction Industry:
Most of the time, the construction business is treated just like any other business and so the same goes with the accounting. The construction business involves production in the long run. This makes it quite difficult for an accountant to evaluate the exact amounts for the work that is not completed yet. However, by following a few methods that are suitable for the construction industry will make the accounting easy and more accurate.
The following two methods can be used for the accounting process:
1. Accounting For Work-In-Progress
2. Accounting For Percentage Completion Basis
- Accounting For Work In Progress: Work in progress means the cost of unfinished goods. For construction business, one of the method to evaluate true financial statements of the business is the evaluation of work in progress I.e. building that is still under construction. Under this method, the accounting is done on the basis of work in progress for the given accounting period.
- Accounting On Percentage Completion Basis: In this method, accounting and evaluation of profit and loss are done on the basis of how much percentage of the standard work of a specific project is completed in a specific period of time. This method is very much prevalent in the construction business.
Year-End Finalization For Construction Industry
Every business needs to manage their accounts at the end of the financial year. The amount keeps fluctuating throughout the year. So, it becomes very necessary to evaluate amounts very precisely as it may affect the profit and loss of the business. Some of the accounts that require special attention while calculating at the year end are as follows:
- Depreciation on equipment: Depreciation means decline in the value of the assets and equipment. The depreciation on the equipment is evaluated since when they are purchased, even if they are not being used during the construction period. The accountant may use any method to charge depreciation.
- Inventory for materials: The stock of material used during the construction business may vary from time to time in a construction business, being that the inventory prices may fluctuate, the supplier may change or irregular flow of income. The same inventory material may cost differently at the starting and end of the year. So, recording of inventory amount very accurately is necessary.
- Building considered as investment or inventory: The purpose of construction must be clear to the accountant. Is the construction for going on for the investment purpose or the sales purpose? The treatment for both in accounting is different.
IFRS Applicable For Construction Industry
IFRS refers to International Financial Reporting Standards. IFRS forms and outlines the standards for the construction industry.
Under IFRS 15, the guidelines are laid for the revenue earned from the contracts with the customers. IFRS 15 states a five-step model in order to generate revenue from contracts with customers.
The five-step model can be explained as follows:
- The type of contract signed with the customer
- Identify the obligations both the parties are involved with under the contract.
- What will be the cost of the contract?
- Determining the prices according to the obligations
- Determining revenue as per the obligations are exercised