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Job Cost Accounting

Job Cost Accounting

GENERAL DISCUSSION

For tax and financial considerations, there are two basic types of projects to track: Contract Projects and Speculative Projects.


The income and costs for both these types of projects may be posted by using either the P&L accounts or the Balance Sheet accounts, each method having specific advantages and disadvantages.


There are also two basic methods for posting income and job costs in QuickBooks: Accounts or Items. Each method has different advantages and limitations, and the determining factor is what type of management reports you would prefer to utilize.


In addition to the above considerations, there are two basic methods for calculating your income tax liability: Percentage of Completion or Completed Contracts. Each method has different taxconsequences and is an issue that you will need to discuss with your tax advisor. For the purposes of the discussion here just understand that the specific method by which you choose to have your tax liability calculated does not effect how you keep your books on a day to day basis for management purposes, it only effects what journal entries you make at tax time to produce the necessary tax reports.


The income and construction costs for a contract project may be posted directly to the Chart of Accounts using P&L accounts, which would allow the use of the accounts-based Budget vs Actual reports and interim and final P&L reports at any time. The biggest advantage here is that the Budget vs Actual reports in QuickBooks are superior to the Items-based Estimate vs Actual reports.


Speculative projects are funded differently in that you are generally borrowing money that is used to construct an asset (the project) that will eventually be sold or converted to income-producing property. In this situation, you need to show the outstanding amount of the construction loan on your Balance Sheet as a loan liability, and therefore you will also need to show the value of the ongoing construction as an Inventory Asset to offset the Construction Loan Liability. This strategy requires the use of QuickBooks Items that are connected to the INV (for inventory) account, thus facilitating Job Cost Variance reporting via use of an Estimate vs Actual report. When the project is completed and sold, you would use a Journal Entry to pay off the construction loan and move the income and construction costs to the appropriate P&L accounts. Due to the nature of a speculative project, you cannot perform an P&L report until it's completion.


In reality, it is certainly possible to use just one of the two methods for all your projects, contract and speculative. For example, you could conceivably post all projects to the P&L accounts, and use a journal entry to "sweep" the costs for the speculative projects to the INV each month. Converesly, you could post all income and costs to Construction Draw Liability and INV Balance Sheet accounts, and then use journal entries to transfer the income and construction costs to the P&L accounts for individual projects upon their sale.


Your decision of which method to use should be free of any tax reporting considerations and based entirely upon the type of job cost management reports you would prefer to see during the construction of the project. P&L and Balance Sheets reports for both Percentage of Completion and Completed Contracts tax accounting can be accurately produced regardless of which method you chose to post your construction costs.



MY RECOMMENDATION

I like to keep things as simple as I can, and for me that means posting everything (contract draws, construction loan draws and construction costs) directly to the P&L accounts and then use memorized journal entries when and if needed (perhaps only once a year at tax time) to move any figures to the Balance Sheet, as follows:


  • If you only do contract projects and your income tax liability is calculated according to the Percentage of Completion method, your Balance Sheet is correct and you never need to make any journal entries.
  • If you only do contract projects and your income tax liability is calculated according to the Completed Contracts method, you only need to do a Journal entry once a year at tax time to move the value of the construction progress draws and the construction costs for your active projects to the Balance Sheet as Work in Progress and Construction Draw Liability. After you print the Balance Sheet report, you can simply delete the journal entry and let the transfer revert back to the P&L accounts.
  • If you do any speculative projects, you only need to do a Journal entry when you apply for a new loan, said entry to move the income and costs of your current spec projects to the Balance Sheet as Construction Loan Liability and Inventory. This is just for your banker because you can always tell the amount of your outstanding loans by reviewing a P&L report for the spec projects. After you print the Balance Sheet report, you can simply delete the journal entry and let the transfer revert back to the P&L accounts.

Following my recommendation allows you to use just one procedure for posting revenue and costs all the time and for every type of project. The only mitigating factor is that you will need to learn to run the reports and do a Journal entry in QuickBooks, an easy to accomplish feat, but it does require you to confront the dreaded Debit and Credit words. My advice here is to JUST GET OVER IT and learn how to do it. It only takes two minutes, and you can use the memorized Journal transactions on the Memorized Transactions List. If it's still too complicated for you, then you can get your Accountant to do it for you.



Job Cost Accounting for Contract Projects
Definition Contract projects are projects wherein you have signed a construction contract with the owner or leaseholder of the property upon which you are going to be making improvements, and may be characterized by the following:
  • You are building the project with their money.
  • The construction loan (if any) is obtained by the Owner.
  • The property settlement (if any) takes place before construction begins.

Some examples of Contract Projects are:
  • Custom homes built on the Owner's property.
  • Remodeling projects
  • Commercial tenant improvements
  • General Contracting projects

Unlike Speculative projects, Contract projects do not require special accounting consideration because of their effect on your Balance Statement. In fact, the only reason anyone would even consider posting contract projects to the Balance Sheet is for tax considerations, and only then if you had decided to have your tax liability calculated by the Completed Contracts method, and even then you can opt for the easier method of posting the construction income and costs to the P&L accounts and use a General Journal entry to move the effected numbers from the P&L accounts to the Balance sheet accounts on an "as needed" basis.

Situation
If Posted to P&L
If Posted to Balance Sheet
Basic Concept Post Checks, Bills and Credit Card charges directly to the COGS accounts via the "Expenses" tab. Post Checks, Bills and Credit Card charges to the WIP Asset account via the WIP Items under the "Items" tab.

Advantages

Best management reports during construction.

Same bookkeeping procedures as used for speculative projects so there's no need to use different procedures while performing day-to-day bookkeeping tasks.

Value of the paid construction costs and the loan draws are continuously posted on the balance sheet accounts during the construction process.

Disadvantages

The Balance Sheet does not reflect the value of the completed construction or the outstanding balance of the construction loan until you perform a Journal entry... which takes about 5 minutes.

Does not provide the best management reports during construction.

Requires an Journal entry to move income and COGS from the the Balance Sheet accounts to the P&L accounts upon the completion of each project.

Summary

I think it's easiest to use the P&L accounts and just learn to do the GL transfer to the Balance Sheet accounts, which you can memorize as a Memorized Transaction on the Memorized Transaction List and call up at any time.

I don't see any advantage to using the Balance Sheet accounts because you still end up doing General Journal entries, it's just that they are from the Balance Sheet to the Income Statement, instead of from the Income Statement to the Balance Sheet.

No matter what method you employ, you will still need to learn to do the General Journal Entries, so just get over it and learn how to do them proficently.

NOTE: This recommendation, and the procedures needed to implement it, are identical to those for Contract projects.

Procedures
If Posted to P&L
If Posted to Balance Sheet
P&L Reports

Use Company P&L Report filtered by the name of the project.

During construction this is only an interim P&L report in that it will only reflect income and COGS entered up to that date, not for the completed project.
Use Company P&L Report filtered by the name of the project.

Cannot be performed until the completion of the project.

Until the sale and subsequent Journal transfer from the Balance Sheet accounts to the P&L accounts, you don't have any entries on your P&L reports, so there's nothing to see.

Job Cost Variance Reports

Use Budget vs. Actual Reports
(accounts based reports)

      OR

Use Estimate vs Actual Reports
(item based reports)

Use Estimate vs Actual Reports
(item based reports)

Contract Progress Draws

Post to P&L via Items connected to Income Accounts.

Post to Balance Sheet via Items connected to Construction Draw Liability Accounts.

Completed Contracts Tax P&L

Use Company P&L report filtered by "Selected Names", then selecting only the projects completed in that tax year.

Use Journal entries to move income, costs and thus profits from the balance sheet accounts to the P&L accounts upon the completion of each project.

Completed Contracts Balance Sheet Use Company P&L report filtered by "Selected Names", selecting only the projects currently under construction, then do a Journal entry to move the Income and COGS for these projects from the P&L accounts to the Balance Sheet as CDL and WIP accounts.

You may also use the Customer Type to filter the P&L report to ascertain the applicable numbers.

No Action Required.

Value of the paid construction costs and the loan draws is continuously posted to the balance sheet accounts during the construction process.

Percentage of Completion Tax P&L

Use a Company P&L report filtered for the tax year.

Not Applicable

If you are using the Percentage of Completion method of determining your tax liability, then there is no need to ever post anything to the Balance accounts for WIP or CDL.
Percentage of Completion Tax Balance Sheet

Write partial invoices dated December 31 for each ongoing project reflecting the value of the unbilled work that is completed in the field.

Post the bills for the corresponding work in your A/P.

These procedures will move your WIP to your Balance Sheet.

Enter partial invoices dated on the last day of the tax year reflecting the approximate value of all previously unbilled work in the field in Accounts Receivable.

Post all bills in A/P.

No Journal entries are required.

Action upon Completion of Project No Action Required

Run final P&L reports for the project. Income and COGS were continuously posted to the P&L as the construction progressed.

Change Customer Type from "Speculative Project" to current tax year Completed Project.
Do a Journal entry to move income and COGS for the Project from the Balance sheet accounts to the P&L accounts.



Job Cost Accounting for Spec Projects
Definition Speculative projects are projects where you own the property and are making the improvements with the intention of selling or leasing the property upon completion, and may be characterized by one of the following:
  • You are borrowing funds or using your own funds to finance the construction costs.
  • You may or may not have a Buyer at the start of the project, but you do expect to either sell the project during or after construction, or convert it into rental property upon completion.

Some examples of Speculative Projects are:
  • Speculative homes for sale or lease.
  • Speculative remodeling for sale or lease.
  • Speculative commercial projects for sale or lease.
  • Real Estate development projects for sale or lease.
  • Homes built under sales contracts to be executed upon completion.
  • Any project built with your own money or with money you've borrowed.

Speculative projects require special accounting consideration because of their effect on your Balance Sheet. In short, the construction costs must be reflected as an inventory asset during and after construction, and the construction loan must be represented as a liability during construction and until it is repayed, ostensibly upon the sale of the project.

Situation
If Posted to P&L
If Posted to Balance Sheet
Basic Concept Post construction costs to the COGS Accounts on the Chart of Accounts or to the Cost Code Items on the Item List.

Post construction loan draws to the Income Account #3150 Construction Loan Draws.

Use a Journal Entry to move these costs and construction loan draws to the Balance Sheet as needed for tax or financial statements.

Post construction costs to the Balance Sheet Inventory accounts using the INV Items on the Items List.

Post construction loan draws to the Balance Sheet Construction Loan Liability accounts.

Use a Journal Entry to move the construction costs and sales proceeds to the P&L Statement upon the sale of the project.

Use a Journal Entry to remove the construction loan balance upon completion. This is necessary because you don't actually receive the funds to pay the construction loan off at closing, the loan gets repayed by the title company at closing.

Advantages

Best management reports during construction.

Same bookkeeping procedures as used for contract projects so there's no need to switch between procedures while performing day-to-day bookkeeping tasks.

Value of the paid construction costs and the loan draws are continuously posted on the balance sheet accounts during the construction process.

Disadvantages

The Balance Sheet does not reflect the value of the completed construction or the outstanding balance of the construction loan until you perform a Journal entry... which takes about 5 minutes.

Does not provide the best management reports during construction.

Requires use of a second type of posting procedure for the speculative projects that is different from the posting procedures used for the contract projects.

Summary

I think it's easiest to use the P&L accounts and just learn to do the GL transfer to the Balance Sheet accounts, which you can memorize as a Memorized Transaction on the Memorized Transaction List and call up at any time.

I don't see any advantage to using the Balance Sheet accounts because you still end up doing Journal entries, it's just that they are from the Balance Sheet accounts to the P∧L accounts, instead of from the P∧L accounts to the Balance Sheet accounts.

No matter what method you employ, you will still need to learn to do the Journal entries, so just get over it and learn how to do them proficiently.

NOTE: This recommendation, and the procedures needed to implement it, are identical to those for Contract projects.

Procedures
If Posted to P&L
If Posted to Balance Sheet
P&L Reports

Use Company P&L Report filtered by the name of the project.

If performed during construction it's only a interim P&L report in that it will only reflect income and COGS entered up to that date, not for the completed project.
Use Company P&L Report filtered by the name of the project.

Cannot be performed until the completion of the project.

Until the sale and subsequent Journal transfer from the Balance Sheet to the Income Statement, you don't have any entries on your P&L reports, so there's nothing to see.

Job Cost Variance Reports

Use Budget vs. Actual
(accounts based reports)

      OR

Use Estimate vs Actual
(item based reports)

Use Estimate vs Actual
(item based reports)

Construction Draws

Post to Income account #3150 Construction Loan Draws via Item #3150 Construction Loan Draws.

Post to Balance Sheet via Items connected to Construction Draw Liability Accounts.

Completed Contracts Tax P&L

Use a Company P&L report filtered by "Selected Names", selecting only the projects completed in that tax year.


      OR
Filter the Company P&L report by the Customer Type for the applicable tax year.

Use Journal entries to move Income and COGS from the balance sheet accounts to the P&L accounts upon the completion of each project.

Completed Contracts Balance Sheet

Use a Company P&L report filtered by "Selected Names", selecting only the projects currently under construction, then do a Journal entry to move the Income and COGS for these projects from the P&L accounts to the Balance Sheet as CDL and WIP accounts.

You may also use the Customer Type to filter the P&L report to ascertain the applicable numbers.

No Action Required.

Value of the paid construction costs and the loan draws is continuously posted to the balance sheet accounts during the construction process.

Percentage of Completion Tax P&L

Not Applicable

You can't use the Percentage of Completion method of determining tax liability for speculative projects.

Not Applicable

You can't use the Percentage of Completion method of determining tax liability for speculative projects.

Percentage of Completion Tax Balance Sheet

Not Applicable

You can't use the Percentage of Completion method of determining tax liability for speculative projects.

Not Applicable

You can't use the Percentage of Completion method of determining tax liability for speculative projects.

Action upon Sale of Project

Run final P&L reports for the project. Income and COGS were continuously posted to the P&L as the construction progressed.

Change Customer Type from "Speculative Project" to current tax year Completed Project.

Use Journal entry to move the sold project's Sale Price and COGS from the Balance Sheet accounts to the P&L accounts.




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