how to classify a accounting ledger for construction

Use a journal, spreadsheets, or construction accounting software to record day-to-day transactions like accounts payable, accounts receivable, labor costs, and material costs incurred. You’ll want to include a description of each transaction, the date of the transaction, and the revenue received. Job costing is important for construction accounting because contractors need to track the costs of their projects accurately to make a profit.

What is a ledger used for in construction?

A general ledger is used in residential construction accounting to record accounts payable, accounts receivable, payroll, inventory, equipment, loan debt and payments, interest revenue and gains and losses on sales of assets. Many home builders also incorporate job costing into their construction general ledger system.

Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on With unit price, risk tends to be shared between the contractor and customer, since production quantities can end up higher than estimated.

The construction ledger supports the company

It aids in compiling key financial statements which are crucial for evaluating your profitability, liquidity, and overall financial health. These include cash flow statements, the income statement, and the balance sheet. Some companies, when they’re small, can record all their transactions in a simple spreadsheet.

So a single employee might have multiple prevailing wage rates and fringe requirements on a single job depending on what they’re doing each hour. Another peculiarity to be accounted for in construction is the practice of withholding retainage, or, retention. Retainage is the predetermined amount of money an owner may hold back from payment until they’re satisfied with contract completion. A common retention amount might be 5-10% of the contract value or invoiced amount, but it can be less or more. The idea of retention is to provide the customer with some security against any deficiencies or defects on the project.

How’s Your Small Business General Ledger Lookin’?

There are many different elements that go into job costing, such as labor costs, materials costs, equipment costs, and overhead costs. Traditional methods of accounting do not account for the specialized accounting and billing methods that are used in construction. Advanced construction accounting software helps you build a solid financial foundation for your construction business. With a proper COA supported by construction accounting software, you can accurately account for income and expenses, and also easily create reports to assess your company’s financial health. With job costing, each project is given its own set of work breakdown structures that encompass the income and expenses tracked through the various phases of the project. This allows project managers and contractors to see exactly how much is being spent on each scope and the entire project.

how to classify a accounting ledger for construction

Any miscellaneous amounts earned from the building during construction reduce the cost of the building. The main difference between construction accounting and standard accounting is that construction accounting must consider the unique features of construction projects. For example, construction accounting must track progress payments, retainage, change orders, and other project-specific financial data. This data must be accurately tracked and reported to manage construction projects effectively and to determine their profitability. This, in turn, impacts the profitability of the construction business.


Your credits and debits in your business ledger must always be in balance. Unbalanced credits and debits can impact your business’s financial statements and give you inaccurate financial reports. An accountant will help you make sense of the numbers, manage your books, generate construction bookkeeping reports, estimate your quarterly tax payments, maintain a healthy cash flow, and protect narrow profit margins. Many construction companies use a “completion percentage” approach, meaning they calculate estimated taxes based on quarterly income and expense reports.

In construction, the term RFQ is used to mean both request for qualifications and request for quote. Project owners use a request for qualifications to narrow down a list… Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.

Balance Sheet – Accounts Typically restricted to Finance and Accounting Core offices only.

And the same project can use different methods for general accounting versus tax accounting. Further, the specialized billing used in the construction industry, such as AIA progress invoicing, increases the workload. Is the process accountants use to track the costs related to fixed-asset construction. Because construction projects necessitate a wide range of prices, CIP accounts keep construction assets separate from the rest of a company’s balance sheet until the project is complete. Using the accrual method for revenue recognition means you record costs and income at the time when you send the client a bill or when your company receives a bill for materials.