Keeping your construction business's books in order starts with proper material and inventory management.
Regular inventory reconciliation ensures your records match reality, avoiding costly errors. Accurately categorize expenses (direct vs. indirect) and use the right accounting method, like percentage-of-completion, to track project progress. T
ools like QuickBooks can help with job costing and expense allocation. Regularly update your journal entries for purchases, adjust inventory records, and tackle discrepancies quickly to stay on top of your financial game.
Organized bookkeeping not only saves time but also unlocks tax benefits and improved profitability.
Reconciling construction material purchases and inventory is crucial for maintaining accurate financial records and ensuring profitability in your business. This process helps you track expenses, manage stock levels, and streamline your tax reporting. Below, we’ll break down this essential accounting task step-by-step.
Material reconciliation involves comparing your physical inventory with your accounting records to identify discrepancies. These could stem from misentries, theft, damage, or timing issues in recording purchases and usage.
Steps to reconcile construction materials include:
For more details on this process, refer to Cornell University’s Guide on Inventory Accounting.
Construction expenses include direct costs like labor, materials, and equipment, as well as indirect costs like overhead and project management fees. Accurate tracking ensures that your project remains on budget and profitable.
In your accounting software:
Learn more from FreshBooks’ Accounting for Contractors Guide.
Journal entries for inventory purchases typically involve debiting the inventory account and crediting accounts payable or cash. Here’s a sample journal entry:
Detailed guidance can be found in Patriot Software’s Guide to Inventory Journal Entries.
The percentage-of-completion method is widely recommended for construction businesses. This method aligns revenue recognition with the project's progress, ensuring accurate financial reporting.
However, smaller businesses may prefer the completed-contract method, which recognizes revenue and expenses only when a project is complete. Consult your CPA to determine the best approach for your business.
For further reading, check out eSub’s Overview of Construction Accounting Methods.
QuickBooks allows you to set up categories and subcategories for construction expenses.
Learn how to optimize QuickBooks for construction from Intuit’s Inventory Accounting Guide.
Regular inventory reconciliation prevents costly discrepancies and improves financial accuracy.
Every material purchase requires a debit to inventory and a credit to accounts payable.
Physical counts uncover theft, damage, and recording errors that digital systems can miss.
Labor and materials are direct costs, while equipment and management are indirect.
Recognize revenue and expenses as your project progresses with the percentage-of-completion method.
Assign expenses to specific projects to track profitability and manage budgets effectively.
Reconciling materials helps you identify over-ordering and minimize unnecessary expenses.
Organizing accounts for construction expenses streamlines reporting and tax preparation.
Timing errors, theft, and misentries are common culprits behind inventory mismatches.
For short-term projects, recognizing revenue only when completed simplifies accounting.
Indirect costs, like permits and insurance, can eat into project profits if not tracked.
Adjusting inventory records regularly ensures your books reflect real-world stock levels.
Accurate records reduce taxable income and maximize potential deductions.
Standard accounting methods don’t always work for complex construction expenses.
Inventory software simplifies tracking, reconciliation, and error identification.