Construction Accounting Steven M. Bragg
Chapter 1 Overview of the Construction Industry... 1 Learning Objectives... 1 Introduction... 1 Nature of the Construction Contractor... 2 Bonding Requirements... 2 The Bidding and Construction Process... 3 Types of Construction Contracts... 4 Fixed Fee Pricing... 4 Cost Plus Pricing... 4 Unit-Price Contract... 5 Construction Contract Modifiers... 5 Contract Changes... 6 Construction Industry Failure Issues... 6 Chapter Summary... 7 Review Questions... 8 Review Answers... 9 Chapter 2 The Construction Accounting System... 11 Learning Objectives... 11 Introduction... 11 Nature of a Construction Accounting System... 11 The Chart of Accounts... 12 The General Ledger... 18 The Work Breakdown Structure... 18 The Job Cost Ledger... 20 Job Cost Ledger Posting... 24 The Equipment Ledger... 25 Chapter Summary... 26 Review Questions... 27 Review Answers... 28 Chapter 3 Construction-Specific Accounting... 29 Learning Objectives... 29 Introduction... 29 Accounting Standard-Setting Organizations... 29 Types of Accounting Methodologies... 29 Cash Method of Accounting... 30 Accrual Method of Accounting... 30 Summary of Accounting Methodologies... 33 Unpriced Change Orders... 33 Contract Claims... 33 Contract Back Charges... 34 Costs Assigned to Jobs... 34 Labor Burden... 35 Equipment Cost Allocation... 35 Chapter Summary... 37 Review Questions... 38 Review Answers... 39 Chapter 4 Construction Transactions... 41 Learning Objectives... 41 Introduction... 41 Double Entry Accounting... 41 Journal Entries... 42 General Entries... 43
Office Rent Expense... 43 Other General Expenses... 44 Inventory Purchases... 45 Supplier Invoice Payments... 45 Client Cash Receipts... 46 Loan Acquisition... 46 Loan Payments... 47 Sale of Stock... 47 Entries Related to the Percentage of Completion... 48 Anticipated Losses on Contracts... 48 Job Costing Entries... 49 Invoice Charged to a Job... 49 Labor Charged to a Job... 50 Inventory Charged to a Job... 50 Client Billings... 50 Equipment Entries... 51 Equipment Rentals... 51 Equipment Repairs... 51 Equipment Charged to a Job... 51 Chapter Summary... 52 Review Questions... 53 Review Answers... 54 Chapter 5 Construction Financial Statements... 55 Learning Objectives... 55 Introduction... 55 The Balance Sheet... 55 The Income Statement... 56 The Statement of Cash Flows... 57 Financial Statement Disclosures... 60 Reporting Options... 61 Chapter Summary... 62 Review Questions... 63 Review Answers... 64 Chapter 6 Fixed Asset Accounting... 65 Learning Objectives... 65 Introduction... 65 What are Fixed Assets?... 65 Fixed Asset Classifications... 66 Accounting for Fixed Assets... 67 The Capitalization Limit... 67 The Base Unit... 68 The Initial Measurement of a Fixed Asset... 69 The Purpose of Depreciation... 69 Depreciation Concepts... 69 Accelerated Depreciation... 70 Sum-of-the-Years Digits Method... 71 Double-Declining Balance Method... 71 Straight-Line Method... 72 Units of Activity Method... 72 MACRS Depreciation... 73 The Depreciation of Land... 75 The Depreciation of Land Improvements... 75 Depreciation Accounting Entries... 75 Accumulated Depreciation... 76 Asset Derecognition... 77 Abandoned Assets... 78 ii
Asset Disposal Accounting... 78 Chapter Summary... 79 Review Questions... 80 Review Answers... 81 Chapter 7 Payables Accounting... 83 Learning Objectives... 83 Introduction... 83 Accounting for Accounts Payable... 83 Early Payment Discounts... 85 The Vendor Master File... 86 Vendor Master File Usage... 86 Supplier Naming Conventions... 87 The Payables Filing System... 88 Government Reporting... 88 The Form 1099-MISC... 88 Treatment of Incorrect Filings... 90 The Form W-9... 91 Chapter Summary... 91 Review Questions... 93 Review Answers... 94 Chapter 8 Debt Accounting... 95 Learning Objectives... 95 Introduction... 95 Basic Debt Accounting... 95 The Amortization Schedule... 96 Reconciling the Debt Account... 97 Participating Mortgage Loans... 97 Chapter Summary... 98 Review Questions... 99 Review Answers... 100 Chapter 9 Contingencies... 101 Learning Objectives... 101 Introduction... 101 Loss Contingencies... 101 Gain Contingencies... 102 Contingency Disclosures... 102 Chapter Summary... 103 Review Questions... 104 Review Answers... 105 Chapter 10 Lease Accounting... 107 Learning Objectives... 107 Introduction... 107 The Nature of a Lease... 107 Lease Types... 107 Initial Measurement... 108 Short-Term Leases... 108 Finance Leases... 108 Operating Leases... 109 Derecognition... 110 Chapter Summary... 110 Review Questions... 111 Review Answers... 112 iii
Chapter 11 Payroll Accounting... 113 Learning Objectives... 113 Introduction... 113 Employee Time Tracking... 113 Gross Pay Calculations... 114 Hourly Rate Plan... 114 Overtime... 115 Types of Payroll Taxes... 116 Social Security Tax... 116 Medicare Tax... 116 Unemployment Taxes... 117 Income Tax Withholdings... 117 Benefits and Other Deductions... 119 Net Pay... 120 Remitting Payroll Taxes... 120 Types of Tax Deposit Schedules... 120 Monthly Deposit Schedule... 121 Semiweekly Deposit Schedule... 121 Federal Unemployment Deposit Schedule... 122 Remittance Method... 122 The Form 941 Quarterly Federal Tax Return... 122 State Tax Remittances... 123 Payments to Employees... 123 The Payroll Register... 124 Form W-2... 126 Payroll Journal Entries... 127 Types of Payroll Journal Entries... 127 Primary Payroll Journal Entry... 127 Accrued Wages... 128 Manual Paycheck Entry... 129 Employee Advances... 129 Accrued Vacation Pay... 130 Tax Deposits... 131 Chapter Summary... 131 Review Questions... 132 Review Answers... 133 Chapter 12 Investments in Construction Joint Ventures... 135 Learning Objectives... 135 Introduction... 135 The Equity Method... 135 The Cost Method... 137 Consolidations... 137 Sales to a Joint Venture... 138 Chapter Summary... 139 Review Questions... 140 Review Answers... 141 Chapter 13 Construction Tax Issues... 143 Learning Objectives... 143 Introduction... 143 The Accounting Method to Use for Tax Reporting... 143 Application of the Cash Method... 144 Application of the Accrual Method... 145 Types of Costs... 146 Types of Accrual Methods... 147 Accrual Method... 147 Percentage of Completion Method... 148 iv
Exempt Percentage of Completion Method... 148 Completed Contract Method... 149 Chapter Summary... 150 Review Questions... 151 Review Answers... 152 Chapter 14 Construction Accounting Controls... 153 Learning Objectives... 153 Introduction... 153 Segregation of Duties... 153 Asset Tracking... 154 Access to Data... 154 Controls for Estimates and Bids... 154 Controls for Cost Plus Pricing Arrangements... 155 Controls for Fixed Fee Pricing Arrangements... 155 Subcontractor Controls... 156 Materials Controls... 157 Labor Controls... 157 Equipment Controls... 158 Job Closure Controls... 158 Percentage of Completion Controls... 159 Change Order Controls... 159 Billing Controls... 160 Budget Controls... 160 Financing Controls... 160 General and Administrative Controls... 161 Construction Fraud... 161 Chapter Summary... 162 Review Questions... 163 Review Answers... 164 Chapter 15 Job Analysis... 165 Learning Objectives... 165 Introduction... 165 Projected Cost and Variance Analysis... 165 Adjusting for the Timing of Billings... 166 Earned Value Management... 167 Schedule Performance Index... 168 Cost Performance Index... 168 Chapter Summary... 169 Review Questions... 170 Review Answers... 171 Chapter 16 Business Structures... 173 Learning Objectives... 173 Introduction... 173 Sole Proprietorship... 173 Partnership... 174 Corporation... 175 C Corporation... 175 S Corporation... 175 Limited Liability Company... 176 Chapter Summary... 176 Review Questions... 177 Review Answers... 178 Glossary... 179 Index... 185 v