Construction Accounting

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Construction accounting is a form of project accounting applied to construction

projects. See also production accounting. Construction accounting is a vitally
necessary form of accounting, especially when multiple contracts come into
play. The construction field uses many terms not used in other forms of
accounting, such as "draw" and progress billing. Construction accounting may
also need to account for vehicles and equipment, which may or may not be
owned by the company as a fixed asset. Construction accounting requires
invoicing and vendor payment, more or less as to the amount of business done.

In the United States, the authoritative literature on Construction accounting is

AICPA Statement of Position SOP 81-1 (SOP 81-1).

Construction Costs
These are all cost related to construction process, right from materials, labor
costs, consultancy and all management expenses. Construction accounting
involves charging construction costs to the applicable contract. Costs fall into
three categories. Direct costs are labor, material, and subcontracting costs, land.
Indirect costs include indirect labor, supervision, tools, equipment costs,
supplies, insurance, and support costs. Selling, general and administrative costs,
are generally excluded from contract costs.

Revenue Recognition
Construction accounting requires unique revenue recognition rules for contracts
in progress.

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In most cases, revenue is recognized using the Percentage of Completion

Method. Under this method, revenue is recognized using an estimate for the
overall anticipated profit for a particular contract multiplied by the estimated
percent complete of that contract. This involves the inherent risk of relying upon
estimates.

Under SOP 81-1, revenue is also allowed to be computed using the Completed
Contract Method. Under this method, contract revenues and costs are not
recognized until the contract is substantially complete. However, this method is
not allowable if the results are significantly different than results using the
Percentage of Completion Method. The Completed Contract Method is allowed
in circumstances in which reasonable estimates cannot be determined. However,
these types of circumstances can be construed as a lack of internal control.

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