Which method of accounting is best for a construction company?

Construction accounting is a specialized field of accounting owing to its unique financial reporting and taxation requirements. The accounting for the construction business is quite different from standard accounting practices. The nature of construction accounting is complex due to long-term contracts, unique deliverables, and billing methods depending upon the pace of job progress, reporting periods, and tax treatments.

Construction companies and contractors can opt for any of the various accrual accounting methods specialized for the industry. Even some companies choose a cash basis for accounting. In the accrual method of accounting, they can opt for one method for short-term projects and another method for projects that span more than a year.

The Cash method of accounting vs. the Accrual method of accounting

The cash method recognizes revenue when it is received and expenses when they are paid. There is no matching of income with expenses as only monetary transactions are involved. There are also certain limits to using the cash method.

The accrual basis of accounting recognizes income when it is earned and expenses when they are incurred, irrespective of monetary exchange. It gives a clearer and more accurate view of a company’s financial position. Companies can use different accrual methods for different projects within construction accounting.

For short-term projects within the same year, companies can use either the cash or accrual methods of accounting. But long-term contracts must use PCM (Percentage of completion method) or Completed Contract Method.

Percentage of completion method:

In the PCM method, contractors estimate the total amount of inputs or outputs of the construction project and apportion it according to the ratio of actual activity in a period to the project’s estimated cost.

Completed-contract method:

Under this method, financial activities are not recognized until the project is completed. In other words, revenue and expenses are deferred until the accounting period in which the contract is fully completed. All the accumulated accrued revenue and expenses appear on the contractor’s income statement.

Xero for a construction company

Xero is one of the best accounting software when it comes to construction accounting. Xero helps to send invoices, track expenses, and do other accounting jobs, even from your phone, using Xero construction accounting software.

How does XERO help?

• It captures expenses, quotes, and invoices from customers for jobs. It also helps to accept payments and manage cash flow.
• It helps to create custom accounting software for builders. It also provides the option to convert quotes to invoices with a “Pay Now” button.
• It helps to track time, cost, and expenses with construction accounting.
• It helps to keep track of outstanding invoices and profit margins.
• It provides integration to 1000+ third-party construction applications.

Start using Xero for a construction company with Accounts Junction

We, at Accounts Junction, provide a customized solution for the construction business. We are silver-certified Xero specialists that fulfill the unique requirements of construction accounting. The team of Accounts Junction is backed by dedicated professionals who are qualified and experienced CPAs and CAs to provide quality services to our clients.