In a complex and evolving contracting business, it was necessary to develop a special accounting system that takes into account all the unique and specific aspects of building and construction projects. Contracting accounting is a unique specialty that aims to record, monitor, and analyze all financial and accounting operations associated with the implementation of construction projects, each project individually. It includes several basic aspects, including accurately tracking costs to understand the cost of implementing the project, preparing financial reports that summarize the company’s financial position, and others.
If you are wondering about the concept of accounting for enterprises and why it was necessary to develop a special accounting system for it, separate from other fields and industries, then follow along with us in this article. We will shed light on the concept of contract accounting in depth and understand its importance for contracting companies. We will also lift the lid on its characteristics that make it different from general accounting for other sectors, and we will clarify its financial accounts and extracts.
What is contracting accounting?
Construction accounting is a specialized branch of accounting that meets the accounting needs of construction companies that undertake building and construction projects. This section addresses the challenges that accompany construction projects, such as long-term schedules, complex cost structures, and contractual obligations.
Contracting accounting represents a vital part of business management for construction companies, as it includes tracking and recording all financial operations related to construction projects individually to ensure that the company ensures that each project is financially viable and to help it closely monitor it from the beginning of planning and contracting to the end of implementation and delivery.
The importance of accounting for contracting
The importance of accounting for contracting lies in the following:
- Determine project costs, such as material and labor costs, and allocate them to the various phases of the project.
- Prepare an accurate budget that includes all aspects of the project to assist in effective planning and controlling expenses.
- Follow up on costs to ensure adherence to the established budget.
- Prepare reports showing the project’s financial status periodically to enhance transparency and help management make informed decisions.
- Facilitate tax compliance by providing special features, which reduce legal risks.
Characteristics of accounting for contracting
Contracting accounting has some characteristics similar to accounting for other businesses due to the different nature of construction work, which makes it necessary to have its own type of accounting. These characteristics are as follows:
1. Based on the idea of projects
It is based on the idea of projects, which means that it separates in the accounting processes each project that the company works on so that it is charged to a cost center separate from the rest of the projects, meaning that the costs related to each project and its revenues are calculated separately. Not only are the costs involved, but the project is also managed separately.
2: Decentralization and mobility of production
Decentralization of production means that production takes place at the sites of various construction projects and not in one fixed site, where workers and equipment move from one site to another to implement each project, so companies must understand the importance of applying contracting accounting that takes into account the many accounting variables and specialized in each project, such as travel costs, transportation and installation of equipment, and different depreciation rates according to the life of the machine and others.
3: long-term, irregular, and flexible contracts
Large and even small construction projects tend to be long-term, extending multiple accounting periods due to the nature of the long planning and implementation phases, and can also be extended due to problems such as a lack of raw materials or bad weather. Accounting for businesses is therefore important to ensure that costs are accurately calculated and that the schedule of payments is organized.
Accounting Accounts for Contracting
The accounts in which the entries are recorded in the accounting books for contracting differ in proportion to each project and its specific needs. Here are some of the main accounts:
1: Cost Account
It is used to record all project costs and expenses, which include raw material costs, equipment purchase or rental costs, personnel wages, administrative costs, and indirect costs.
2-Expense Account
Used to record the rest of the expenses, such as social insurance for employees, sales tax, and depreciation.
3: Customer Account
It is used to record the receivables of project owners and all receivables for payment by the entrepreneur.
4: Advance Payments Account
It is used to record amounts paid by customers in advance as part of the value of contracted services or projects before the project is implemented. The usual down payment rate is 10% of the project value.
5-Escrow account
It is used to record amounts held as collateral by clients to ensure that services or projects are carried out correctly. This amount is a guarantee for a maintenance period agreed upon in the project contract.
6-Subcontractors account
It is used to record financial operations and transactions related to works carried out by a subcontractor, which is a person or company that specializes in carrying out construction or repair works without having a direct relationship with the owner or the final customer.
Financial documents for contract accounting
Due to the distinct and unique nature of the contracting field, there are some financial documents or extracts specifically designed for contracting accounting, which are as follows:
1 executive extract
It is ongoing throughout the duration of the project and is prepared periodically to compare what was planned for the project with actual implementation. This document is similar to the ongoing extract and the final extract in terms of contents, but it is an internal document for the contracting company and is not submitted to any external party. It also includes some different analytical data, which is specific to each item of the project and its implementation stages, such as the cost of the item, the selling price, and the profit value.
2: Financial extract
It is prepared by calculating its net value based on what has been implemented from the project, deductions such as insurances, and any items that are updated after signing the contract. The financial extract is the invoice provided by the company implementing the project to the client, whether an individual or a company.
3. Final extract
The final extract is a financial document that is prepared and submitted when the company finishes implementing the construction project and delivers it to the client once and for all.
Qoyod: Your Best Choice for Accounting for Successful Businesses
The Qoyod system plays a vital role in facilitating contract accounting to improve your company’s financial performance, as it provides a full range of professional accounting services as follows:
1-Project Creation
Qoyod enables you to create projects in the system, separate them, and load each of them to its own cost center so that you can carry out important accounting operations for each project separately and see each project, its status, and financial details such as profit and loss, balance sheet, and business documents separately. You can choose who can see the project if it is private.
2: Preparing extract invoices
Qoyod enables you to prepare invoices to suit the construction projects in your contracting company, as you can set up what you want to show or hide from the invoices when they are issued. It also allows you to add additional notes to be filled out when preparing the invoice, such as the percentage of work completed previously, the remaining percentage of the contract, the value of the advance payment, the due guarantee for the performance of the work, and others.
3-User management
After you identify the sites that your company is working on, you can specify each user in the system for the site on which he works so that he can see the data for this project only, which enhances privacy and increases customer confidence.
4-Track costs
Qoyod manages accounting entries in which all costs and expenses for each client are recorded for each project. Each invoice generated can be allocated to a specific client, and thus the costs of each project can be tracked separately.
5: Financial Reporting
Qoyod automatically prepares accurate financial reports using the information in the registered entries to provide a comprehensive view of the financial performance of each project.
Not only that, but it also offers you many other services, such as inventory management, asset management, financial statement issuance, and many more.
Conclusion
Having known the concept of contract accounting as a specialized field that focuses on the unique dynamics of construction projects and its importance in tracking each project that the company is working on separately, you must have concluded that the use of modern accounting software has become critical to maintaining accuracy and efficiency in accounting processes.
Qoyod System is the best accounting system; it provides complete security for your company’s data and information, provides infinite accuracy in all accounting operations, and also provides you with the ability to try the system completely free for 14 days. You only need to easily subscribe to Qoyod System and enjoy all services without even a credit card.
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