Cloud accounting is always an updated online solution; all data is stored safely on the cloud server. Cloud accounting, also called online accounting, has the same function as desktop accounting. It moves the whole process to the cloud and then expands it. There is no desktop application. Yet, there is another specialized type of accounting tailoring to accurately reflect the distinctive nature of the construction business called construction accounting.
Definition
Project accounting and GAAP (Generally Accepted Accounting Principles) are a subset of construction accounting, applied to those complying with the standards. But, just as unique as it is, so are some aspects of this type of accounting. Construction accounts will follow some extremely specific rules when reporting the firm’s financial health.
Construction accounting is a state of project accounting in that costs are assigned to specific contracts. In the accounting system, there is a separate job set up, for each construction project, and the costs are assigned on the project through coding costs to the distinctive job number as costs incurred. The costs are mainly compromised of labor and materials with additional charges for architectural and consulting fees. There is a number of indirect costs charged to construction projects, including:
- costs of supervision
- equipment rentals
- support costs
- insurance
In a construction project, administrative costs will not be charged, unless it is allowed by the customer.
The two methods
To address the accounting challenges, construction companies choose from various accounting methods. Choosing among them will depend on different criteria. Remember that construction companies use different accounting methods using the same project for tax and general accounting purposes.
- Cash basis method. Cash basis accounting works as a method of recognizing revenue after cash is collected and expenses are spent. Loss or income is the difference between:
- cash in
- cash out
- Accrual basis method. It follows the accounting matching principle, recognizing revenue within the period earned, not when received and expenses within the period incurred.
Advantages of cash basis and accrual basis method
The cash basis method advantage is it is simple. In addition, the method skips potential cash flow timing issues because a business will pay taxes merely on cash received. Cash basis accounting affords businesses significant flexibility for income management levels by timing disbursements within the period deadlines.
Income can possibly be deferred to another period by delaying receipts. On the contrary, accelerating payments can reduce profitability in a period that impacts tax liability.
The accrual basis method advantage is providing a full and more accurate image of the financial results. It is the mere method that yields GAAP. Therefore, it is required by investors and lenders. On an accrual basis, small construction companies establish a policy to handle retainage. The money earned by the contractor for the rendered services but withheld by the customer for the pending project approval defers tax liability on the revenue retainage portion.
