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What type of accounting is used in construction?

Construction is a very different industry. Rather than following the classic buy-and-sell model, the construction industry deals with various projects and moving parts. It can be very difficult to track when you receive the payment, how much and what the taxes are.

Construction accounting follows a specialised practice with a unique subject line. Various reporting methods and tax rules. The construction business deals with contract terms and asynchronous billing systems. There have been significant changes in the working sphere.

What is construction accounting?

Accounting is one of the most important parts of any business. It helps you understand the influx of money- where it comes from and where it goes. However, when it comes to construction accounting, the procedure is slightly different.

In the construction industry, a project usually lasts for a long time, even years. Hence in these conditions, the payment term can get extremely complicated. The construction industry contractors will therefore need to follow the unique regulations concerning Construction Industry Scheme and VAT reverse charge.

Therefore, construction accounting can help to cope with it. The construction industry will use different principles to ensure that people are paid at the right time. This helps to provide complications.

How is construction accounting different?

Construction accounting usually follows a certain set of rules, especially in taxes and generally accepted accounting principles. The rules will eventually adapt to the GAAP and taxation. Construction accounting usually follows the unique characteristics, such as

  • Decentralised production.
  • Project-bases workstyle.
  • Operations across the job.

For the construction industry, the revenue happens with building contracts and custom terms, deliverables and specifications. Most contractors in today’s time are using job costing methods. The job costing procedure is slightly different from the regular one, focusing on product-based profitability. The job costing is applicable for direct costs such as materials and labour.

Tips for choosing the right construction accounting method

Apart from the GAAP considerations, the contractors must be aware of the tax rules. Hence, the accounting method is a crucial factor to consider. The construction accounting method should have guidelines in the Internal Revenue Code section (IRC460). The IRC460 follows industry-specific tax rules inclusive of several exceptions.

The tax treatment is usually calculated based on contract by contract basis that uses different methods. The two types of construction methods, as determined by the length, include the following:

  • Long-term: The long-term contract will usually span for more than a year. It can often be calculated under the PCM. The small contractors can, however, be a major exception.
  • Short-term: Short-term contracts refer to the taxes that will be completed within the same year. These usually follow the cash and accrual method.

What are the best construction accounting practices?

Construction accounting has many structures, especially in allocating indirect and direct projects. The costs will further be optimising the tax reports. The contract companies will need to decide whether to use the accrual-basis or cash-basis accounting method. The contractor will need to manage the orders, therefore, determining whether they can make a particular project profitable.

Some of the prominent practices for construction accounting include the following:

Cash-basis accounting

In cash basis accounting, you will have two choices: accrual basis and cash basis. Small construction businesses usually follow cash-basis accounting. On the other hand, the company will record revenues depending on the expenses and received based on how the vendors pay. Comparatively, cash-basis accounting is simple as it helps in managing day-to-day finances. Therefore, it also needs less financial expertise. However, companies with more than $25 million as revenue will not be able to use cash basis accounting because of tax purposes.

Project management

As discussed above, the nature of the construction industry is such that even the best saving plans can get hampered. Therefore, as a construction business owner, you must be ready to keep up with the changes. In case of any alterations or modifications, you must be ready to adapt to them.

Some of the changes would include changes in design, the scope of the project and more. When you start a project in the construction industry, you must be ready to anticipate the project. At the beginning of the project itself, the terms must be clarified. This should be done to avoid any confusion or complications that may arise while raising the invoice.

Project management with proper documentation is one of the major requirements of the construction accounting industry. Documenting and monitoring the changes will give you an idea of what is required. You can raise an invoice and ensure you’re paid for the work.

Compliance with the charges

As per the rule of the UK government, compliance with the charges is an important factor to consider. The requirements across the construction industry are hitting most accounting firms. This is not only having an impact on the industry but also on understanding how the entire process is smoothly done.

The UK government has introduced a few changes across the construction accounting industry. One of the major introductions has been the VAT reversible charges. Furthermore, the government has also introduced the requirement of paying taxes through the Making Tax Digital initiative.

The adjustments in the rules of the Construction Industry Scheme also have a huge factor to play. It is advisable to consider the basics and understand the impact of it.

Do you need an accountant?

If you’re in the construction industry, you must assess your needs to understand whether or not you need a construction accountant. The construction accountants will assist you with the process of completing reports. They are going to help you manage the taxes and finances. Each of these would constitute the success of your business. With a streamlined accounting system, you can capitalise not only on the expenses but also on the experience.

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