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Construction Accounting and Financial Management 3rd
Ed Steven Peterson 3rd Edition Unknownsteven Peterson
Digital Instant Download
Author(s): UnknownSteven Peterson
ISBN(s): 9780132845434, 0132845431
Edition: 3
File Details: PDF, 6.10 MB
Year: 2013
Language: english
Construction Accounting and
Financial Management
THIRD EDITION
Steven J. Peterson, MBA, PE

Weber State University
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Library of Congress Cataloging-in-Publication Data

Peterson, Steven J.
Construction accounting and financial management / Steven J. Peterson.—3rd ed.
p. cm.
ISBN-13: 978-0-13-267505-5
ISBN-10: 0-13-267505-6
1. Construction industry—Accounting. 2. Construction industry—Finance. 3. Managerial accounting. I. Title.
HF5686.B7P48 2013
624.068'1—dc23
2011037796
10 9 8 7 6 5 4 3 2 1
ISBN 10: 0-13-267505-6

ISBN 13: 978-0-13-267505-5
Preface
Several years ago I was asked to teach a course on construc- included in this book are based on actual situations encoun-
tion accounting and finance. The course was to cover the tered by the author.
fundamental principles needed by construction managers to This book is organized in five parts: introduction to
successfully manage the finances of construction companies. construction financial management, accounting for finan-
In preparing to teach this course I found that these princi- cial resources, managing costs and profits, managing cash
ples were scattered among many disciplines, including busi- flows, and making financial decisions.
ness management, engineering economics, accounting,
The first part—comprising Chapter 1—introduces the
estimating, project management, and scheduling. After I
reader to construction financial management, explains
reviewed the available textbooks, two things were apparent.
why construction financial management is different
First, the material was often presented in a generic fashion
from financial management in other industries, and
and failed to address how the principles applied to the con-
defines the role of a construction financial manager.
struction industry. For example, in most accounting text-
books only a few pages were devoted to the accounting The second part—comprising Chapters 2 through 6—
procedures for long-term contracts, which comprise a bulk describes how to account for a company’s financial
of the projects for general construction companies. Second, resources. Accounting for these resources is built
with the topics scattered among many disciplines and text- around a company’s accounting system.
books, the topic of how the different components of con- The third part—comprising Chapters 7 through 11—
struction financial management were interrelated and examines how to manage the costs and profits of a con-
interacted was being ignored. struction company. This must be done at the project
Financial management may be defined as the use of a level as well as at the company level.
company’s financial resources and encompasses all decisions The fourth part—comprising Chapters 12 through 16—
that affect a company’s financial health. Many everyday looks at how to manage a company’s cash flows and how
decisions affect a company’s financial health. The difference to evaluate different sources of funding cash needs.
between a marginally profitable and a very profitable com-
The fifth part—comprising Chapters 17 and 18—
pany is good financial management. Business schools teach
explores ways to quantitatively analyze financial decisions.
the fundamental principles of financial management; how-
ever, because of the many unique characteristics of the con- After reading this book, you should have a better under-
struction industry, the usefulness of these financial principles standing of the following:
as taught by business schools is limited. To be useful, these d The basic financial principles that are widely used in the
principles must be adapted specifically to the construction business world and how to modify them so that they
industry. For example, in the construction industry equip- work for the construction industry. Application of these
ment is mobile and may be needed for multiple jobs during principles will help you better manage your business.
a single month. Traditional accounting methods and finan- d Construction accounting systems, which will help you
cial statements do not allow a company to properly manage
manage the accounting systems and use accounting
and account for its equipment.
information to manage a company. The accounting sys-
This book was written to help construction professionals—
tem is the heart and soul of financial management.
both those who are working in the construction industry
and those seeking a degree in construction management— d Financial and accounting principles, so that you may inter-
learn how the principles of financial management can be act with accountants and bankers at a professional level.
adapted to and used in the management of construction The following changes have been made to the third edition:
companies. This book will be most useful for general man-
agers and owners of companies who are responsible for d The equations have been stacked to make them easier to
managing the finances of the entire company; however, read.
many of these principles are useful to project managers and d Discussion questions have been added to the end of
superintendents. For the project manager or superintendent each chapter.
who desires to stand out in a company, there is no better way d The tax information has been updated.
than to improve the profitability of projects through the d A figure has been added for each accounting transaction
principles of sound financial management. The book also
showing how a balance is maintained between the bal-
discusses how owners and general managers can manage
ance sheet, income statement, job cost ledger, and the
construction projects by sound management of their project
equipment ledger.
managers, superintendents, and crew forepersons.
This book explains common financial principles, dem- To access supplementary materials online, instructors
onstrating how these principles may be applied to a con- need to request an instructor access code. Go to www.
struction situation and how these principles affect the pearsonhighered.com/irc to register for an instructor
financial performance of a company. Many of the examples access code. Within 48 hours of registering, you will receive a
iii
iv Preface
confirming e-mail including an instructor access code. Once This textbook brings all of the key financial manage-
you have received your code, locate your text in the online ment principles needed by construction managers under
catalog and click on the Instructor Resources button on the left one cover, addressing how they are applied in the construc-
side of the catalog product page. Select a supplement, and a tion industry and how they interact. Many of the examples
login page will appear. Once you have logged in, you can access in this book are based on my fourteen years of experience in
instructor material for all Prentice Hall textbooks. If you have construction financial management. Join me on a journey of
any difficulties accessing the site or downloading a supple- discovery as we discuss the fundamental principles of finan-
ment, please contact Customer Service at http://247pearsoned. cial management that are needed to make a construction
custhelp.com/. The materials available to instructors include: company a financial success.
instructor’s manual, PowerPoint slides, Excel spreadsheet Best Wishes,
solutions to the Excel-based homework problems, electronic Steven J. Peterson, MBA, PE
copies of the figures and tables, and an equation list.
Contents
PART I Equipment Costs 19
INTRODUCTION TO Overhead 20
CONSTRUCTION FINANCIAL Other Income and Expenses 20
MANAGEMENT 1 Income Tax 20
CHAPTER 1 Construction Financial The Job Cost Ledger 21

Management 2 The Equipment Ledger 25
What Is Financial Management 3 • Conclusion 26 • Discussion Questions 26
Why Is Construction Financial Management

CHAPTER 3 Accounting Transactions 28
Different 3
Invoice Charged to a Job without Retention 29
Project Oriented 3
Invoice Charged to a Job with Retention 29
Decentralized Production 4
Paying Invoices 30
Payment Terms 4
Labor Charged to a Job 30
Heavy Use of Subcontractors 4
Labor Charged to General Overhead 32
Who Is Responsible for Construction
Management 4 Paying an Employee’s Wages 33
What Does a Financial Manager Do? 5 Paying Payroll Taxes 33
Accounting for Financial Resources 5 Paying for Benefits 34
Managing Costs and Profits 6 Vacation Time for Jobsite Employees 34
Managing Cash Flows 6 Recording Office Rent 35
Choosing among Financial Alternatives 7 Recording Office Depreciation 36
• Conclusion 7 • Discussion Questions 7 Recording General Overhead Invoices 36
Billing a Client 37
Billing for Retention 37
PART II
Receiving Payment from a Client 37
ACCOUNTING FOR FINANCIAL
Purchase of Equipment with a Loan 38
RESOURCES 9
Loan Payment 39
CHAPTER 2 Construction Accounting Equipment Depreciation 39
Systems 10
Leased Equipment with an Operating Lease 39
Cost Reporting versus Cost Control 10
Leased Equipment with a Capital Lease 40
The General Ledger 11
Lease Payments for a Capital Lease 40
Method of Accounting 11
Amortization of a Capital Lease 41
Cash 12
Invoice for Equipment Repairs 42
Accrual 13
Equipment Charged to a Job 42
Percentage of Completion 13
Equipment Charged to an Employee 43
Completed Contract 13
Sale of Equipment 43
The Balance Sheet 14
Purchase of Inventory 44
Assets 15
Charging Inventory to a Job 45
Liabilities 16
Signing a Construction or Development Loan 45
Owner’s Equity 17
Drawing Funds from a Construction or
The Income Statement 17 Development Loan 46
Revenues 17 Recording Changes in Costs and Profits in Excess
Construction Costs 18 of Billings 46
v
vi Contents
Recording Changes in Billings in Excess of Costs Degree of Fixed Asset Newness 86

and Profits 47 Months in Backlog 87
• Conclusion 48 • Discussion Questions 48 • Conclusion 87 • Discussion Questions 87
• Problems 48 • Problems 87 • Case Study 92
CHAPTER 4 More Construction
Accounting 51 PART III
Committed Costs and Estimated Cost MANAGING COSTS AND
at Completion 51 PROFITS 95
Overbillings and Underbillings 53
CHAPTER 7 Managing Costs 96
Internal Controls 56
Monitoring and Controlling Construction Costs 96
Computerized Accounting Systems 57
Material Purchases 96
• Conclusion 58 • Discussion Questions 58
• Problems 58 Labor 97
Subcontracts 98
CHAPTER 5 Depreciation 61
Equipment 98
Straight-Line Method 62
Other 99
Sum-of-the-Years Method 62
Monitoring and Controlling General Overhead
Declining-Balance Method 64 Costs 99
MACRS 67 Monitoring Job Profitability 99
Placing in Service and Disposing of an Asset 67 Cost-Loaded Schedule 100
IRS Standard Recovery Periods and Depreciation Schedule Performance Index 101
Methods 68
Cost Performance Index 103
Section 179 Deduction 72
Target Levels for CPI and SPI 103
Depreciation for Nontax Purposes 72
Project Closeout Audit 104
• Problems 74 • References 75 • Conclusion 105 • Discussion Questions 105
• Problems 105
CHAPTER 6 Analysis of Financial CHAPTER 8 Determining Labor Burden 107
Statements 76
Cash Equivalents and Allowances 111
Depreciation and Financial Analysis 77
Payroll Taxes 111
Quick Ratio 77
Unemployment Insurance 112
Current Ratio 78
Workers’ Compensation Insurance 113
Current Liabilities to Net Worth Ratio 78
General Liability Insurance 113
Debt to Equity Ratio 79
Insurance Benefits 114
Fixed Assets to Net Worth Ratio 79
Retirement 114
Current Assets to Total Assets Ratio 80
Union Payments 114
Collection Period 80
Other Benefits 114
Average Age of Accounts Payable 81
Assets to Revenues Ratio 82 • Problems 115
Working Capital Turns 83
CHAPTER 9 Managing General
Accounts Payable to Revenues Ratio 83 Overhead Costs 117
Gross Profit Margin 84 What Is General Overhead? 117
General Overhead Ratio 84 The General Overhead Budget 117
Profit Margin 85 Items to Include in the General
Return on Assets 85 Overhead Budget 118
Return on Equity 86 Estimating General Overhead 121
Contents vii
Types of Costs 122 Nondeductible Expenses/Costs 180

Sample of a General Overhead Budget 123 Tax Credits 180
• Conclusion 131 • Discussion Questions 131 Alternate Minimum Tax 181
• Problems 131
Projecting Taxable Income 181
CHAPTER 10 Setting Profit Margins • Conclusion 181 • Discussion Questions 181
for Bidding 133 • Problems 182 • References 182
The Profit Equation 133 CHAPTER 14 Cash Flows for
Contribution Margin 134 Construction Companies 183
Projecting Break-Even Volume of Work 134 Incorporating Construction Operations 183
Projecting Break-Even Contribution Margin Incorporating General Overhead 192
Ratio 135 Income Taxes, Interest, Loan Payments, and Cash
Adjusting the Financial Mix 136 Balance 193
Profit and Overhead Markup 137 Determining the Minimum Monthly Balance 196
• Conclusion 139 • Discussion Questions 139 Fine-Tuning, What-If, and Sensitivity Analysis 197
• Problems 139
• Problems 199
CHAPTER 11 Profit Center Analysis 141
Sources of Profit 141 CHAPTER 15 Time Value of Money 202
Allocation of General Overhead 143 Equivalence 202
Profit Center Analysis 144 Single-Payment Compound-Amount Factor 203
Crews as Profit Centers 145 Single-Payment Present-Worth Factor 205
Project Management as Profit Centers 146 Uniform-Series Compound-Amount Factor 206
Estimators as Profit Centers 146 Uniform-Series Sinking-Fund Factor 208
Types of Jobs as Profit Centers 146 Uniform-Series Present-Worth Factor 209
Customers as Profit Centers 148 Uniform-Series Capital-Recovery Factor 210
Equipment as Profit Centers 149 Cash Flow Diagrams 211
• Conclusion 149 • Discussion Questions 150 Complex Cash Flows 211
• Problems 150
Find Unknown Periodic Interest Rates 215
Inflation and Constant Dollars 217
PART IV
Taxes on Interest 218
MANAGING CASH FLOWS 153 • Conclusion 218 • Discussion Questions 218
• Problems 219
CHAPTER 12 Cash Flows for
Construction Projects 154 CHAPTER 16 Financing a Company’s
Cash Flow for Projects with Progress Payments 154 Financial Needs 221
Cash Flow for Projects with a Single Payment 167 Interest 221
• Conclusion 170 • Discussion Questions 170 Simple Interest 221
• Problems 170
Compound Interest 222
CHAPTER 13 Projecting Income Taxes 174 Yield or Annual Percentage Yield 222
Corporate versus Personal Income Tax 174 Fixed versus Variable Interest Rates 224
Taxable Income 174 Loans and Lines of Credits 224
Payment of Income Taxes 175 Loans 225
Income Tax Rates 175 Long-Term Loans 225
Marginal or Incremental Tax Rate 176 Amortization Schedule 229
Capital Gains and Losses 178 Closing Costs 231
Tax Consequences of Depreciation 178 Short-Term Loans 235
viii Contents
Lines of Credits 236 Rate of Return 260

Compensating Balance 237 Incremental Rate of Return 263
Commitment Fee 238 Capital Recovery with Return 264
Leasing 239 Payback Period without Interest 265
Trade Financing 239 Payback Period with Interest 267
Credit Cards 240 Project Balance 268
Equity Financing 240 Noneconomic Factors in Decision Making 269
Selecting a Banker 241 • Conclusion 270 • Discussion Questions 270
• Problems 271
Applying for a Loan 241
Loan Documents 242 CHAPTER 18 Income Taxes and Financial
• Conclusion 242 • Discussion Questions 242 Decisions 273
• Problems 242 Losses Carried Forward 273
Different Tax Rates 274
PART V Depreciation 275
MAKING FINANCIAL Capital Gains 275
DECISIONS 245 Tax Credits 276
CHAPTER 17 Tools for Making Financial After-Tax Cash Flows 276
Decisions 246 • Conclusion 282 • Discussion Questions 283
• Problems 283
Sunk Costs 248
MARR (Minimum Attractive Rate of Return) 248 Appendix A Computerized Accounting Systems 284
Adjusting Life Spans 249 Appendix B Excel Primer 286
Study Period 249 Appendix C Trend Analysis 290
Shortening an Alternative’s Life 249 Appendix D Derivation of Selected Equations 294
Lengthening an Alternative’s Life 250
Appendix E Interest Factors 296
Repurchasing an Alternative 250
Appendix F Glossary 328
Net Present Value or Present Worth 251
Appendix G List of Variables 334
Incremental Net Present Value 256
Future Worth 258 Index 335
Annual Equivalent 259
P A R T O N E
INTRODUCTION
TO CONSTRUCTION
FINANCIAL MANAGEMENT
In this section we introduce you to construction financial man-

agement, discuss how it is different from financial management
in other industries, and why strong financial management is
needed in the construction industry. This section includes:
CHAPTER 1: Construction Financial Management
1
C H A P T E R O N E
C O NS T R U CT ION F IN AN C IAL
M A NAGEM EN T
In this chapter you will learn what financial management beginning in 1990 to more than 80,0005 construction com-
is and why the financial management of construction panies. These failures include only those business failures
companies is different from the financial management of that resulted in a loss to their creditors and do not include
contractors who closed their doors without leaving their
most other companies.
creditors with a loss. These failures are divided among com-
panies of all ages. Figure 1-2 shows the breakdown of these
failures by age of the business. During 1997 the greatest
I
n December 2007 the U.S. economy slipped into a reces-
number of business failures was for construction companies
sion. The U.S. construction industry was the hardest hit
that had been operating for longer than 10 years.6
industry, losing 19.8% of its jobs between December
Since 1988 the construction industry has experienced a
2007 and June 2009.1 By 2010, unemployment in the con-
higher-than-average business failure rate when compared to
struction industry had risen to 20.1%.2
the failure rate of all businesses.8
One study found that of 27,536 construction compa-
In 2002, two of Japan’s largest construction compa-
nies, all of which were started in 1998, over 70% of them had
nies—Sato Kogy Company and Nissan Construction—filed
gone out of business seven years later. The survival rate of
for bankruptcy in the same month.9 Also in the same month,
these companies is shown in Figure 1-1.3
Germany’s second largest construction company, Philipp
In 1997, 10,8674 construction companies in the United
Holzmann AG, which had been in business for longer than
States failed, bringing the total for the eight-year period
150 years, filed for bankruptcy.10
Percent of Companies Surviving
Large and small, old and new, domestic and foreign
construction companies are among the statistics of failed
100.0%
construction companies.
What are the sources of failure for construction
80.0% companies?
60.0%
40.0%
20.0%
FIGURE 1-2 Business Failure by Age7
0.0%
1998 1999 2000 2001 2002 2003 2004 2005 5
Dun & Bradstreet, Business Failure Record, 1986–97, annually as quoted
FIGURE 1-1 Business Failure by Age by Surety Information Office, Why Do Contractors Fail?—downloaded
from http://www.sio.org/html/whyfail.html on April 3, 2003.
1 6
Goodman, Christopher J. and Mance, Steven M., “Employment Loss and the Dun & Bradstreet, Business Failure Record, 1986–97, annually as quoted
2007–09 Recession: An Overview,” Monthly Labor Review, April 2011, p. 6. by The Center to Protect Worker’s Rights, The Construction Chart Book,
2 3rd Edition, September 2002.
Johnson, Brian, “Construction Job Losses Continue,” Finance and
7
Commerce, downloaded from http://finance-commerce.com/2010/07/ Ibid.
construction-job-losses-continue/ on May 10, 2011. 8
Ibid.
3 9
Knaup, Amy E. and Piazza, Merissa C., “Business Employment Dynamics The Associated Press, Nissan Construction to File for Bankruptcy, The
Data: Survival and Longevity, II.” Monthly Labor Review, September 2007, New York Times on the Web, April 1, 2002, and Ken Belson, Contractor
pp. 6 and 8. in Japan Is Seeking Bankruptcy, The New York Times on the Web,
4
Dun & Bradstreet, Business Failure Record, 1986–97, annually as quoted March 5, 2002.
10
by The Center to Protect Worker’s Rights, The Construction Chart Book, Andrews, Edmund L., Kirch in Danger of Bankruptcy After Rescue
3rd Edition, September 2002. Note: Dun & Bradstreet stopped publishing Talks Break Down, The New York Times on the Web, April 3, 2002, and
business failure data after 1997. Skyscrapers.com.
2
Construction Financial Management 3
The Surety Information Office—an office that collects WHY IS CONSTRUCTION

data on surety bonds—has identified six broad warning FINANCIAL MANAGEMENT
signs that a construction company is in trouble. They are
“ineffective financial management systems . . . bank lines
DIFFERENT?
of credit constantly borrowed to the limits . . . poor esti- Construction companies are different from most other
mating and/or job cost reporting . . . poor project man- companies and are faced with many unique challenges and
agement . . . no comprehensive business plan . . . [and] problems not faced by other companies in other industries.
communication problems.”11 Four of these six sources of Although the construction industry is producing a prod-
failure are directly related to the financial management uct—as do manufacturing plants—the construction of
of the company. The primary source of failure for a con- buildings, roads, and other structures is different from the
struction company is poor financial management, includ- manufacturing of most other products. Because of these
ing improper accounting procedures and systems, failure unique characteristics, the financial management principles
to manage the company’s cash flow, failure to accurately applied to other product-producing industries often need
track and manage job and equipment costs, excessive to be modified before they are applied to the construction
overhead, failure to plan for and achieve an acceptable industry, otherwise they are useless.
profit margin, excessive debt, and failure to make business To understand the unique characteristics and chal-
decision based on sound financial data. Without sound lenges faced by the managers of construction industries, let’s
financial management, construction companies are set- compare the management of a construction company to the
ting themselves up for failure. management of a manufacturing plant. For this example, we
look at the manufacturing of fiberglass insulation. The man-
ufacturing of fiberglass batt insulation can be summarized in
WHAT IS FINANCIAL the following steps:
MANAGEMENT? 1. Sand and other ingredients necessary to make glass are
Financial management is the use of a company’s financial delivered to the plant and stored in silos.
resources. This includes the use of cash and other assets— 2. The glass-making ingredients, delivered to the mixing
such as equipment. Many everyday decisions affect a combin by conveyor belts or other means, are mixed in the
pany’s financial future. For example, the decision to bid on specified proportions.
a large project can have a great impact on the finances of 3. After mixing, the ingredients are fed into a furnace,
a company. When deciding whether to bid on a project, where they are heated to make molten glass.
a manager may need to address the following questions:
Does the company have enough cash resources to per- 4. The molten glass is passed through a machine that spins
form this work or will the company need outside financ- the glass into fibers, cools the fibers, and adds liquid
ing? Can the company get bonded for this work? If not, binders that cause the glass fibers to stick together.
what changes need to be made in the company’s finan- 5. The spun glass is placed on a conveyor belt, where the
cial structure so that the company can get a bond for the speed of the conveyor belt controls the thickness of the
project? Should the company hire employees to perform insulation.
the work or should the company subcontract out this 6. As the insulation proceeds along the conveyor belt, it is
labor? Should the company lease or purchase the addi- cut to width, and, if required, paper backing is added.
tional equipment needed for this project? If the company 7. Finally, the insulation is cut to length, packaged, and
purchases the equipment, how should it be financed? Will stored for shipment.
this project require the company to increase its main office
overhead? And, finally, what profit and overhead markup Now that you have a basic understanding of the process
should be added to the bid? The answers to all of these used to manufacture fiberglass insulation, let’s compare the
questions will affect the company’s finances. The answer management of this process to the management of a con-
to one of the questions may change the available options struction company.
to other questions. For example, if the manager decides
to hire employees to perform the work on the project, the
project will require more financial resources than if the Project Oriented
company had hired subcontractors to perform the labor The insulation manufacturer is process oriented, whereas
and may leave the company with insufficient resources to the construction company is project oriented. Although the
purchase the additional equipment, and leaving leasing the insulation manufacturer produces different types of insula-
equipment as the only option. tion, the range of products that they produce is limited. In
the above example, the insulation produced may be of differ-
ent thickness or R values, different widths, and with or with-
11
Surety Information Office, Why Do Contractors Fail?—downloaded from out paper backing and packaged in rolls or bundles of 8-foot
http://www.sio.org/html/whyfail.html downloaded on April 3, 2003. batts. All of these products are similar with slight variations.
4 CHAPTER ONE
For many construction companies, each product is unique performs its work at a number of decentralized locations.
but often the products are very different. It is not uncom- Insulation manufacturing plants are set up at a fixed location
mon for a construction company to be working on a tenant with the equipment being dedicated to a specific manufactur-
finish in a high-rise tower, a fire station, and an apartment ing process for years. Employees come to the same plant year
complex at the same time. Even when a construction com- after year. In the construction industry the equipment and
pany is working on similar products—such as a homebuilder employees are seldom dedicated to a single project year after
or a company building a number of convenience stores—the year. Equipment and employees may move from job to job
projects are often different due to site conditions and loca- on a regular basis. As a result, the location of each employee
tions, which affects the availability of labor and materials. and piece of equipment must be tracked to ensure that their
Because insulation manufacturers have a limited number costs are charged to the correct job. Additionally, each crew
of products they produce repeatedly, it is easier for them to and piece of equipment must be managed as a profit center.
determine their production costs. When a manager has pro-
duced a million square feet of R-11 insulation with paper Payment Terms
backing packaged in a 15-inch-wide by 40-foot-long roll, it
is easier to project the cost to produce the next 10,000 square The insulation manufacturer bills the buyer at the time the
feet than it is if the product has never been produced before. insulation is shipped or ordered, with the expectation that the
Construction companies often give clients fixed prices for a buyer will pay the full bill within a specified number of days.
product that the company has never built or for a product For many construction companies, their work consists of long-
that the company has never built using the local group of term contracts for individual projects, with monthly progress
suppliers and subcontractors available at the project location. payments being made by the owner as the project is being built.
The insulation manufacturer sells the same product to Additionally, the owners often withhold retention—funds used
a wide variety of buyers at locations other than the place to ensure the contractor completes the construction project—
the insulation is manufactured. In the construction indus- thus deferring payment of a portion of the progress payment.
try, projects are often custom-built for a specific owner on a The insulation manufacturer is constantly shipping mate-
specific location. The insulation manufacturer can deal with rials and billing for them, which creates a relatively uniform
fluctuation in demand by producing and storing extra prod- cash flow cycle throughout the month. For many construction
ucts when demand is slower for use when the demand is companies, all of their projects are on a similar billing cycle,
higher. It is relatively easy to store 50,000 square feet of insu- which creates huge spikes in the cash needed for the projects.
lation for immediate shipment to meet some future demand. As a result, construction companies have unusual cash flows
With most of a construction company’s work occurring at and require modification to accounting and other financial
the individual project’s location, the construction company procedures to handle retention and the timing of cash flows.
cannot store unused production during slow times for use
on future projects. How can you store 500 cubic yards of Heavy Use of Subcontractors
excavation for immediate use on some future project? To The insulation manufacturer would never subcontract out
deal with this, the construction company must constantly a step in its manufacturing process, yet many construction
bid new work to keep the company’s workforce fully utilized companies rely heavily on subcontractors’ work. The use of
or build speculative projects—projects without owners or subcontractors allows a construction company to tap into
buyers. Speculative building is a risky venture for the com- a subcontractor’s financial assets during the construction
pany because the product cannot be moved and often must process. The use of subcontractors has a great impact on the
be modified before it can be sold to another buyer. finances of a construction company.
No other industry is as project based as is the construc- Because of these unique characteristics, it is impor-
tion industry. Almost everything a construction company tant for the manager of a construction company to have a
does is a project. Because of this, a construction company sound understanding not only of financial management but
must keep accurate construction costs for each and every also of how financial management principles are applied to
project that it constructs. Not only must the cost be kept for the construction industry. The tools that financial manag-
each project, but also the cost must be kept for each group ers are taught in business schools must be modified to take
of components on a project. This data is necessary to control into account the unique characteristics of the construction
the costs of the current project and also the cost of the com- industry, if they are to be useful to construction managers.
ponents may be used in the bidding of future projects. With
each project requiring a different mix of labor, materials,
and equipment, knowing the cost of the components for a WHO IS RESPONSIBLE
project is necessary to bid future projects. FOR CONSTRUCTION
MANAGEMENT?
Decentralized Production The person ultimately responsible for the financial manage-
The insulation manufacturers perform all of their work at ment of a construction company is often the owner or general
a centralized location, whereas the construction company manager. Many of the tasks related to financial management
are delegated to estimators, superintendents, or project man- for controlling costs, as well as the different accounting
agers—particularly those tasks that are project specific. For methods available to construction companies. Because of
this reason, and because many project managers, superin- the unique characteristics of construction companies, there
tendents, and estimators aspire to move up within the com- are some key differences between accounting systems and
pany or start their own construction business, it is important financial statements for the construction industry and other
for all construction management students to understand the industries. Before you can understand how to read a con-
principles of financial success for a construction company. struction company’s financial statements or how construc-
Nothing will put an employee on the fast track to success tion costs are tracked and managed, you must understand
within a company faster than increasing the company’s prof- how construction accounting systems operate.
itability through sound construction financial management. In Chapter 3 you will gain a better understanding of
In this book the term financial manager is used to designate how different accounting transactions are processed in the
superintendents, project managers, estimators, general man- accounting system. There are a number of unique trans-
agers, or owners who are responsible for all or part of the actions that take place in construction accounting that do
financial management of a construction company or a con- not occur in other industries. Most of these transactions
struction project. are a result of the construction industry’s focus on job cost-
ing, equipment tracking, and accounting for long-term
contracts. Understanding these transactions is important
WHAT DOES A FINANCIAL for three reasons: First, some project costs—such as labor
MANAGER DO? burden and equipment costs—are often generated by the
accounting system rather than an invoice or time card.
The financial manager is responsible for seeing that the Understanding how these costs are obtained will help you
company uses its financial resources wisely. A financial gain a better understanding of how to estimate these costs
manager’s responsibilities may be broken down into four and incorporate them in the financial analysis of the project.
broad areas that include accounting for financial resources, Second, financial managers must review the accounting
managing costs and profits, managing cash flows, and mak- reports for errors—improperly billed costs and omitted
ing financial decisions. costs—and ensure that the necessary corrections are made.
Understanding how the costs are generated will help you
Accounting for Financial Resources better understand how to interpret the accounting reports.
Finally, for the general manager and owner, understand-
Financial managers are responsible for accounting or tracking construction accounting is necessary to ensure that the
ing how the company’s financial resources are used, includ- accounting system is set up to meet the needs of the com-
ing the following: pany. Many construction companies are using substand-
Making sure that project and general overhead costs are ard accounting systems because the management does not
accurately tracked through the accounting system. understand how accounting systems should be structured to
Ensuring that a proper construction accounting system meet the needs of the construction industry.
has been set up and is functioning properly. In Chapter 4 you will increase your understanding of
construction accounting systems. You will learn to track
Projecting the costs at completion for the individual committed costs outside the accounting system if your com-
projects and ensuring that unbilled committed costs— pany’s accounting system does not track committed costs,
costs that the company has committed to pay but has not which will also help you understand how accounting sys-
received a bill for—are included in these projections. tems track committed costs. You will learn to use committed
Determining whether the individual projects are over- or costs to project the estimated cost and profit at completion
underbilled. for projects. You will also learn to calculate over- and under-
Making sure that the needed financial statements have billings. Finally, you will learn about the internal controls
been prepared. needed to protect your financial resources and what to look
Reviewing the financial statements to ensure that the for in computerized construction accounting systems.
company’s financial structure is in line with the rest of In Chapter 5 you will learn the differences among
the industry and trying to identify potential financial the methods available for depreciating construction
problems before they become a crisis. assets, including the methods used for tax purposes.
Understanding the difference in depreciation methods is
Chapters 2 through 6 will help prepare you to fulfill these necessary for a manager to interpret the financial statement
functions. and financial ratios, which is covered in the next chapter.
In Chapter 2 you will be introduced to the structure Simply put, changing the method of depreciation can have
of construction financial statements, including the differ- a significant impact on the company’s financial statements.
ent ledgers used by construction accounting systems. You An understanding of depreciation is also necessary when
will also learn the difference between accounting systems preparing income tax projections, which is discussed in
that are used for cost reporting and systems that are used Chapter 13.
6 CHAPTER ONE
In Chapter 6 you will learn to use financial ratios In Chapter 9 you will learn how to prepare a general
to analyze the company’s financial statements, includ- overhead budget that may be used to track overhead costs.
ing comparing the company’s ratios to industrial aver- It is easy for a company to squander its profits by failing
ages. This will include adapting commonly used ratios to to control general overhead costs. Construction managers
the unique characteristics of the construction industry. often spend enormous amounts of time and effort budg-
Analysis of the financial statements will help the financial eting, tracking, and controlling construction costs while
manager identify problems before they become a crisis. ignoring general overhead costs. Just as a project manager
These problems may be life threatening to the company or superintendent tracks and manages construction costs on
(such as realizing that the company will not be able to pay a project, the general manager or owner needs to track and
its bills in the upcoming months) or simple planning issues manage the general overhead costs. The key to doing this is
(such as identifying that the company’s equipment is aging to set and follow a general overhead budget. A general over-
and that funds need to be set aside to replace this equip- head budget is also needed to prepare the company’s annual
ment in the next few years) cash flow projection, which is discussed in Chapter 14.
In Chapter 10 you will learn to set profit margins for use
Managing Costs and Profits in bidding and how the profit changes as the volume of work
changes. You will also learn to determine the volume of con-
Financial managers are responsible for managing the
struction work and profit and overhead markup necessary to
company’s costs and earning a profit for the company’s
cover the costs associated with the general overhead. Profits
owners. Financial managers rely heavily on the reports
are used to pay for general overhead costs and provide the
from the accounting system in their management of costs.
owners with a profit. If the profits are insufficient to cover
Managing the company’s costs and profits includes the
the general overhead costs, the company will consume its
following duties:
available cash and fail. If the profits fail to provide the owner
Controlling project costs with a reasonable profit, the owner may decide there are bet-
Monitoring project and company profitability ter places to invest his or her money and the company will

lose financing.
Setting labor burden markups
In Chapter 11 you will learn to analyze the profitabil-
Developing and tracking general overhead budgets ity of different parts of the company and identify where the
Setting the minimum profit margin for use in bidding company needs to make changes to improve profitability.
Analyzing the profitability of different parts of the com- You will learn to choose between hiring a subcontractor
pany and making the necessary changes to improve and self-performing work. You will also learn to monitor
profitability the profitability of different customers and identify which

customers should be developed and which customers your
Monitoring the profitability of different customers and
company would be better off without.
making the necessary marketing changes to improve
profitability
Chapters 7 through 11 will help to prepare you to fulfill
Managing Cash Flows
these functions. Financial managers are responsible for managing the cash flows
In Chapter 7 you will learn to monitor and control for the company. Many profitable companies fail because they
construction costs for materials, labor, subcontractors, simply run out of cash and are unable to pay their bills. The
equipment, other costs, and general overhead. You will duties of a financial manager include the following:
also learn to measure the success of the project by moni- Matching the use of in-house labor and subcontractors to
toring profitability, using the schedule performance index,
the cash available for use on a project
the cost performance index, and project closeouts. These
Ensuring that the company has sufficient cash to take on
skills help financial managers determine the success of
projects and identify problem areas on projects, regardless an additional project
of whether you are a project manager or superintendent Preparing an income tax projection for the company
who wants to know how your project is doing, or a gen- Preparing and updating annual cash flow projections for
eral manager or owner who wants to know how well your the company
project managers and superintendents are running their Arranging for financing to cover the needs of the con-
projects.
struction company
In Chapter 8 you will learn to determine the labor
burden markup. This helps you better understand how to Chapters 12 through 16 will help prepare you to perform
project these costs, whether they are to be used to bid a new these functions.
job, price a change order, or project the cost to complete In Chapter 12 you will learn to develop a cash flow pro-
the project. This helps the general manager and owner jection for a construction project from both the perspec-
determine the labor costs needed to prepare a general over- tive of a construction company that is receiving progress
head budget. payments or draws from the project’s owner and from the
perspective of a construction company that receives a sin- financing and how to compare two or more financial options,
gle payment when the project is sold—such as is the case which are the topics of Chapters 16, 17, and 18. Additionally,
with many homebuilders. For companies in either of these you will learn how to adjust interest rates for inflation.
situations, the company must pay for some or all of the In Chapter 16 you will learn about financial instru-
construction costs—especially labor—from the company’s ments that can be used to provide the necessary cash for a
funds before being reimbursed for these costs. To cover construction company’s operation. You will also learn to
these costs the company needs cash. Because inadequate compare debt instruments with different conditions and
funding of the construction company can spell doom for learn how loan provisions and closing costs can increase the
a construction project as well as for all of the companies effective interest rate on a loan or line of credit. An under-
involved, it is important that managers accurately project standing of these principles helps you reduce borrowing
both the amount and timing of the cash required by a con- costs and determine the best way to provide the cash needed
struction project. Understanding the cash flow for a con- to operate a construction company. Success in obtaining
struction project is a prerequisite to preparing a cash flow financing for a company can allow the company to take on
for an entire construction company, which is discussed in additional projects, whereas failure to obtain financing can
Chapter 14. spell doom for a company.
In Chapter 13 you will learn the fundamentals of income
taxes and how to prepare an income tax projection. Income Choosing among Financial Alternatives
taxes are a significant expense to the company and need to
Financial managers are responsible for selecting among
be included in the company’s annual cash flow projection.
financial alternatives. These decisions include the following:
Having an unexpected income tax bill can reduce the funds
available for use on construction projects to a dangerously Selecting which equipment to purchase
low level. Deciding in which areas of the business to invest the
In Chapter 14 you will learn how to prepare an annual company’s limited resources
cash flow projection for a construction company. This is
necessary to ensure that the company has sufficient cash There are many financial tools that are available to quantita-
for the upcoming year. Should a financial manager find tively analyze the alternatives. In Chapters 17 and 18 you will
that there are insufficient funds, he or she will have time learn to use these tools.
to arrange for the necessary financing to provide the nec- In Chapter 17 you will learn ten quantitative meth-
essary funds. Annual cash flow projections for a company ods that may be used to analyze financial alternatives and
are prepared by projecting the annual revenues and con- choose the alternative that is best for the company. Without
struction costs for the construction company by combin- some quantitative method, it is hard for managers to deter-
ing the cash flows from the individual jobs or are based mine which option is best. Understanding these skills is
on historical data. The financial manager must then com- necessary for any manager who must decide where to invest
bine the projected revenues, construction costs, the general limited capital.
overhead budget, and the projected income taxes with the In Chapter 18 you will learn how income taxes can
company’s available cash to determine the cash needs of influence the choice of financial decisions and how to incor-
the company. porate income taxes into the decision-making tools from
In Chapter 15 you will learn to convert cash flows occur- Chapter 17. If income taxes affected all alternatives in the same
ring in one time period to an equivalent cash flow occur- way, income taxes would not be an issue; however, income
ring at another time period or into a uniform series of cash taxes can make some financial alternatives preferable. With
flows occurring over successive periods. Understanding the income tax rates of up to 38%, financial managers must take
time value of money is a prerequisite to understanding debt income taxes into account by weighing financial alternatives.
Conclusion projects. This book is designed to help the reader develop

the financial management skills required to become a suc-
A construction company is a risky venture. Each year, many cessful construction manager.
construction companies go out of business. Operating a suc-
cessful construction company requires a specialized set of
financial management skills, because of the unique nature Discussion Questions
of the construction industry. Unlike other industries, the
construction industry faces a number of challenges includ- 1. According to the Surety Information Office, what are
ing: (1) constantly building unique, one-of-a-kind projects, the six warning signs that a construction company is in
(2) building a project at a different location each time, (3) financial trouble?
dealing with retention and progress payments, and (4) rely- 2. Who is responsible for financial management in a con-
ing heavily on the use of subcontractors to complete the struction company?
8 CHAPTER ONE
3. Why is construction financial management different construction companies fail or outlines the failure of a
from the financial management of other companies? specific construction company. Answer the following
4. What activities are involved in accounting for the com- questions about the article you selected:
pany’s financial resources? a. Who wrote the article and what makes the writer/s a
5. What activities are involved in managing the company’s creditable source?
costs and profits? b. What sources of failure does the writer/s identify?
c. Which of these sources could be grouped under
6. What activities are involved in managing the company’s accounting and financial management?
cash flows? d. How does this article underscore the need for a great
7. List some examples of financial decisions that construc- accounting system and strong financial management?
tion managers must make. Come to class prepared to discuss your findings.
8. Using the journal articles, newspapers, and the
Internet, find one article that discusses the reasons why
P A R T T W O
ACCOUNTING FOR
FINANCIAL RESOURCES
In this section we look at how to account for the company’s

financial resources. Accounting for these resources is built
around a company’s accounting system. This section includes
the following chapters:
CHAPTER 2: Construction Accounting Systems
CHAPTER 3: Accounting Transactions
CHAPTER 4: More Construction Accounting
CHAPTER 5: Depreciation
CHAPTER 6: Analysis of Financial Statements
9
C H A P T E R T W O
C O N ST RUCT ION
A C C O U N T IN G SYST EM S
In this chapter you will be introduced to the structure of And, finally, the accounting system collects and pro-
construction financial statements, including the differ- vides the data needed to manage the finances of the
ent ledgers used by construction accounting systems. company, including data for the company as a whole,
each project, and each piece of heavy equipment. To
You will also learn the difference between accounting
successfully manage the company’s financial resources,
systems that are used for cost reporting and systems the accounting system must provide this data in time
that are used for controlling costs, as well as the dif- for management to analyze the data and make correc-
ferent accounting methods available to construction tions in a timely manner. Accounting systems that fail
companies. Because of the unique characteristics of to do this are simply reporting costs.
construction companies, there are some key differences
between accounting systems and financial statements COST REPORTING VERSUS
for the construction industry and other industries. Before COST CONTROL
you can understand how to read construction company
Cost reporting is where the accounting system provides
financial statements or understand how construction
management with the accounting data after the opportunity
costs are tracked and managed, you must understand has passed for management to respond to and correct the
how construction accounting systems operate. problems indicated by the data. When companies wait to
enter the cost of their purchases until the bills are received,
management does not know if they are under or over budget
C
onstruction accounting systems include the soft- until the bills are entered, at which time the materials pur-
ware, hardware, and personnel necessary to operate chased have been delivered to the project and may have been
a construction accounting system. Construction consumed. The extreme case of cost reporting is where com-
accounting systems serve four purposes. panies only look at the costs and profit for each project after
the project is finished. Cost reporting is characterized by ac-
First, the accounting system processes the cash receipts
counting reports that show where a company has been fi-
(collecting payments) and disbursements (paying bills)
nancially without giving management an opportunity to
for the company. The accounting system should ensure
proactively respond to the data.
that revenues are billed and collected in a timely fashion
Cost control is where the accounting system provides
and that timely payments are made only for bona fide
management with the accounting data in time for manage-
expenses incurred by the company. Failure to collect
ment to analyze the data and make corrections in a timely
revenues or careless payment of bills can quickly deplete
manner. Companies that enter material purchase orders and
the cash reserves of a company and, if left unchecked,
subcontracts, along with their associated costs, into their ac-
can bankrupt a company.
counting system as committed costs before issuing the pur-
Second, the accounting system collects and reports the chase order or subcontract allow management time to
data needed to prepare company financial statements address cost overruns before ordering the materials or work.
that are used to report the financial status of the com- Committed costs are those costs that the company has com-
pany to shareholders and lending institutions. These mitted to pay and can be identified before a bill is received for
reports are needed to assure shareholders and lending the costs. For example, when a contractor signs a fixed-price
institutions that the company is solvent and is wisely subcontract, he or she has committed to pay the subcontrac-
managing its financial assets. tor a fixed price once the work has been completed and, short
Third, the accounting system collects and reports the of any change orders, knows what the work is going to cost.
data needed to prepare income taxes, employment Accounting systems that track committed costs give manage-
taxes, and other documents required by the government. ment time to identify the cause of the overrun early on, iden-
Failure to pay taxes and file other required documents— tify possible solutions, and take corrective action. Cost
such as W-2s and 1099s—on time results in the assess- control is characterized by identifying problems early
ment of penalties. and giving management a chance to proactively address the
10
Construction Accounting Systems 11
problem. A lot of money can be saved by addressing perva- The accounting system for many construction compa-
sive problems—such as excessive waste—early in the project. nies consists of three different ledgers: the general ledger, the
If a company’s accounting system is going to allow job cost ledger, and the equipment ledger. The general ledger
management to control costs rather than just report tracks financial data for the entire company and is used to
costs, the accounting system must have the following key prepare the company’s financial statements and income
components: taxes. The job cost ledger, a subsidiary ledger to the general
ledger, is used to track the financial data for each construc-
First, the accounting system must have a strong job cost tion project. The equipment ledger, a subsidiary ledger to
and equipment tracking system. The accounting system the general ledger, is used to track financial data for heavy
should update and report costs, including committed equipment and vehicles. All construction companies should
costs and estimated cost at completion on a weekly have a general ledger and a job cost ledger. Companies with
basis. Having timely, up-to-date costs for the project lots of heavy equipment or vehicles should have an equip-
and the equipment is a must if management is going to ment ledger.
manage costs and identify problems early.
Second, the accounting system must utilize the prin- THE GENERAL LEDGER
ciple of management by exception. It can be easy for
managers to get lost in the volumes of data generated by Like all other companies, construction company accounting
the accounting system. The accounting system should systems have a general ledger. The general ledger consists of
provide reports that allow management to quickly all of the accounts necessary to track the financial data
identify problem areas and address the problems. For needed to prepare the balance sheet, income statement, and
example, as soon as bills are entered into the account- income taxes. A chart of accounts lists all of the accounts in
ing system, management should get a report detailing the general ledger. A sample chart of accounts is shown in
all bills that exceed the amount of their purchase order Figure 2-1. In the chart of accounts, the accounts for the bal-
or subcontract. Problems that are buried in volumes ance sheet are listed before the accounts for the income
of accounting data are often never addressed because statement. In Figure 2-1, accounts 110 through 430 are used
management seldom has time to pour through all of for the balance sheet and accounts 500 through 950 are used
the data to find the problems, or if they are found they for the income statement. The accounts on the chart of ac-
are often found too late for management to address the counts appear in the order they appear in on the balance
problem. Providing reports that flag transactions that sheet and income statement; however, some accounts from
fall outside the acceptable limits is necessary if manage- the chart of accounts may not appear on the balance sheet or
ment is going to control costs. By having reports that income statement because successive accounts may be rolled
flag items that fall outside acceptable limits, manage- up into a summary account that appears on the balance
ment can make addressing these items a priority. sheet or income statement. Other items—such as profit—
that appear on the balance sheet and income statement are
Third, accounting procedures need to be established to
not included in the chart of accounts because they are calcu-
ensure that things do not fall through the cracks. These
lated from accounts on the chart of accounts. The way trans-
procedures should include things such as who can issue
actions are handled in the general ledger is based on the
purchase orders and what to do when a bill is received
accounting method used by the construction company.
for a purchase order that has not been issued. The pro-
cedures should also identify the acceptable limits for
different types of transactions. Procedures ensure that METHOD OF ACCOUNTING
the accounting is handled in a consistent manner and
give management confidence in the data that it is using There are four methods of accounting available to construc-
to manage the company. tion companies. They are: cash, accrual, percentage of com-
pletion, and completed contract. The cash and accrual
Finally, the data must be easily and quickly available methods are two widely used accounting methods and are
to management and other employees who are directly used in many industries. The percentage-of-completion and
responsible for controlling costs. It does little good to completed contract methods are used when companies enter
collect cost data for use in controlling costs if the data long-term contracts, which are defined by the Internal
cannot be accessed. Where possible the reports should Revenue Code as “any contract for the manufacture, build-
be automatically prepared by the accounting software. ing, installation, or construction of property if such contract
This eliminates the time and effort needed to prepare is not completed within the taxable year in which such con-
the reports manually. Additionally, frontline supervi- tract is entered into.”1 The key difference between the ac-
sors who are responsible for controlling costs should counting methods is how and when they recognize income,
readily have access to their costs. Holding supervisors expenses, and profits. A construction company may use a
responsible for costs at the end of a job while not giving different method of accounting when preparing its financial
them access to their costs throughout the project denies
1
them the opportunity to proactively control costs. Title 26, Subtitle A, Chapter 1, Subchapter E, Part II, Subpart B, Section 460.
12 CHAPTER TWO
CHART OF ACCOUNTS
110 Cash 730 Repairs and Maintenance

120 Accounts Receivable-Trade 740 Fuel and Lubrication
121 Accounts Receivable-Retention 750 Taxes, Licenses, and Insurance
130 Inventory 798 Equipment Costs Charged to Employees
140 Costs and Profits in Excess of Billings 799 Equipment Costs Charged to Jobs
150 Notes Receivable
155 Due From Construction Loans 805 Advertising
160 Prepaid Expenses 806 Promotion
199 Other Current Assets 810 Car and Truck Expenses
811 Computer and Office Furniture
210 Building and Land 812 Repairs and Maintenance
220 Construction Equipment 819 Depreciation
230 Trucks and Autos 820 Employee Wages and Salaries
240 Office Equipment 821 Employee Benefits
250 Less Acc. Depreciation 822 Employee Retirement
260 Capital Leases 823 Employee Recruiting
299 Other Assets 824 Employee Training
825 Employee Taxes
310 Accounts Payable-Trade 830 Insurance
311 Accounts Payable-Retention 835 Taxes and Licenses
320 Billings in Excess of Costs and Profits 840 Office Supplies
330 Notes Payable 841 Office Purchase
340 Accrued Payroll 842 Office Rent
341 Accrued Payables 843 Office Utilities
342 Accrued Taxes 844 Postage and Delivery
343 Accrued Insurance 845 Janitorial and Cleaning
344 Accrued Vacation 846 Telephone
350 Capital Leases Payable 850 Charitable Contributions
360 Warranty Reserves 855 Dues and Memberships
379 Other Current Liabilities 860 Publications and Subscriptions
380 Long-Term Liabilities 865 Legal and Professional Services
870 Meals and Entertainment
410 Capital Stock 875 Travel
420 Retained Earnings 880 Bank Fees
430 Current Period Net Income 881 Interest Expense
885 Bad Debts
500 Revenue 891 Unallocated Labor
892 Unallocated Materials
610 Materials 893 Warranty Expense
620 Labor 898 Miscellaneous
630 Subcontract 899 Overhead Charged to Jobs
640 Equipment
650 Other 910 Other Income
920 Other Expense
710 Rent and Lease Payments 950 Income Tax
720 Depreciation
FIGURE 2-1 Chart of Accounts
statements than it does when it is preparing its income taxes. small construction companies. Another advantage of the cash
Let’s look at these accounting methods. method of accounting is that it can easily be used to defer in-
come tax. For example, to decrease the company’s tax liability
for the current year all the company has to do is to have the
Cash project’s owners who are going to make payments during the
Cash is the easiest of the accounting methods to use. Revenue last few weeks of the company’s fiscal year hold the checks
is recognized when the payments from the owner is received, until the beginning of the next fiscal year. This moves the rev-
and expenses are recognized when bills are paid. Profit at any enues from the current year into the next year, reduces the
point equals the cash receipts less the cash disbursements. profit for the year, and thereby reduces the income tax liability
Because it is easy to use, it is often the preferred method for for the year. The company can further reduce the profit by
paying any bills that are due during the first few weeks of the recognize 40% of the expected revenue, 40% of the expected
next year on the last day of the current year. Regular “C” cor- costs, and 40% of the expected profit. At the completion of the
porations whose average annual receipts for the last three tax- project, the construction company must look back over the life
able years are more than $5 million may not use the cash of the project and determine whether income taxes were over-
method of accounting for income tax purposes. paid or underpaid for each tax year. For underpayments of in-
The big disadvantage of the cash method is that financial come taxes the construction company must pay interest to the
statements based on the cash method are of little use for finan- Internal Revenue Service on the amount underpaid, in addi-
cial management because of the delay in recognizing revenue tion to paying the underpaid taxes. For overpayment, the
and expenses. Because of this, many financial institutions will Internal Revenue Service must pay interest to the construction
not accept financial statements based on the cash accounting company on the overpayment, in addition to refunding the
method. Construction companies that use the cash method of overpaid taxes. The IRS requires large companies—companies
accounting for income tax purposes should use another ac- with gross receipts of more than $10 million over the last three
counting method for financial management. years—to use the percentage-of-completion method for all of
their general construction contracts. The IRS also requires that
Accrual all general construction contracts that will take more than two
years to complete be tracked using the percentage-of-comple-
The accrual method tries to provide a more accurate financial
tion method.2 Larger construction companies are required to
picture by recognizing revenues when the company has the
allocate general overhead to the individual projects when using
right to receive the revenues and by recognizing the expenses
the percentage-of-completion method. The percentage-of-
when the company is obligated to pay for the expenses, rather
completion method provides the best picture of the company’s
than when its cash flows occur. Revenues are usually recog-
financial situation.
nized when the company bills the project’s owners. Because
the company does not have the right to receive the retention
until the project is complete, the revenue associated with the
Completed Contract
retention is usually not recognized until the project is com- The completed contract method recognizes revenues and ex-
plete and the company has the right to receive the retention. penses at the completion of the project. The benefit of recog-
Expenses are often recognized when the company receives a nizing revenues and expenses at the completion of the project
bill from the supplier or subcontractors. Because the accrual is that the revenues and expenses are known. Historically,
method recognizes revenues and expenses earlier than the speculative builders used the completed contract method be-
cash method, financial statements prepared using the accrual cause the contract amount was not known until the project
method are more useful for financial management than those was sold. The disadvantage of the completed contract method
prepared by using the cash method. Use of the accrual method is that it can create large swings in income.
may also result in the payment of income taxes on revenues To get the best picture of a company’s financial health, a
not received. Furthermore, companies that front-end load construction company should use the method that best
their contracts—put most or all of the profit at the beginning matches its costs to its revenues and profits. For most gen-
of the contract—may be paying income taxes on imaginary or eral contractors this is the percentage-of-completion
unearned profits. method. For smaller companies, the added cost and com-
plexity of using the percentage-of-completion method may
Percentage of Completion not be warranted and the company may use the cash method.
For tax purposes, construction companies must use the
The percentage-of-completion method requires construction
percentage-of-completion accounting method for long-
companies to recognize revenues, expenses, and estimated
term contracts, except for (1) contracts entered into by a
profits on a construction project through the course of the
construction company whose average annual receipts for the
project based upon the percent of the project that is compete.
last three taxable years is less than $10 million and who esti-
Revenues are recognized when the company bills the project’s
mates that the contract can be completed within a two-year
owners. The revenue associated with the retention is recog-
period beginning at the contract commencement date or (2)
nized, along with the revenues from the bill, unlike the accrual
home construction contracts, including improvements to
method, which allows the company to defer recognizing reten-
dwelling units and the construction of new dwelling units in
tion as revenue until it has the right to receive the retention.
buildings containing no more than four dwelling units.
Expenses are recognized when the company receives a bill
Because the income tax regulations are very complex and
from the supplier or subcontractors. Under the percentage-of-
ever changing, it is a good idea for construction companies
completion method the estimated profits must be equally dis-
to employ the services of a certified public accountant (CPA)
tributed over the entire project based on the expected cost of
when determining what method of accounting to use for fi-
the project. Revenues, expenses, and the estimated profits are
nancial and tax purposes.
calculated based on the percentage of the project that is com-
plete, which is determined by dividing the costs to date by the 2
IRS, Accounting for Construction Contracts—Construction Tax Tips http://
total expected costs for the project. For example, if the project www.irs.gov/businesses/small/industries/article/0,,id=97986,00.html
had incurred 40% of the expected costs, the company would Downloaded on April 27, 2011.
14 CHAPTER TWO
THE BALANCE SHEET sheet for a construction company using the percentage-of-
completion accounting method is shown in Figure 2-2.
The balance sheet is a snapshot of a company’s financial as- The balance sheet is divided into three sections: assets, li-
sets, liabilities, and the value of the company to its owner— abilities, and owner’s equity. The balance sheet reports the
often referred to as net worth or equity—at a specific point in values of each of the accounts in the balance sheet portion of
time. Balance sheets are commonly prepared at the end of the chart of accounts at the time the balance sheet is printed.
each month and at the end of the fiscal year. A typical balance For example, the amount reported as cash on the balance
BIG W CONSTRUCTION
BALANCE SHEET
Current Last
Year Year
ASSETS
CURRENT ASSETS
Cash 200,492 144,254
Accounts Receivable-Trade 402,854 308,253
Accounts Receivable-Retention 25,365 21,885
Inventory 0 0
Costs and Profits in Excess of Billings 32,586 15,234
Notes Receivable 12,548 0
Prepaid Expenses 5,621 4,825
Other Current Assets 11,254 7,225
Total Current Assets 690,720 501,676
FIXED AND OTHER ASSETS

Land 72,000 72,000
Buildings 103,862 103,862
Construction Equipment 95,284 95,284
Trucks and Autos 51,245 31,556
Office Equipment 56,896 42,546
Total Fixed Assets 379,287 345,248
Less Acc. Depreciation 224,512 182,990
Net Fixed Assets 154,775 162,258
Other Assets 178,544 171,256
Total Assets 1,024,039 835,190
LIABILITIES
Current Liabilities
Accounts Payable-Trade 325,458 228,585
Accounts Payable-Retention 22,546 18,254
Billings in Excess of Costs and Profits 5,218 11,562
Notes Payable 15,514 45,250
Accrued Payables 15,648 16,658
Accrued Taxes 10,521 8,254
Accrued Vacation 3,564 3,002
Capital Lease Payable 0 0
Warranty Reserves 0 0
Other Current Liabilities 25,438 35,648
Total Current Liabilities 423,907 367,213
Long-Term Liabilities 153,215 99,073
Total Liabilities 577,122 466,286
OWNER’S EQUITY
Capital Stock 10,000 10,000
Retained Earnings 436,917 358,904
Current Period Net Income 0 0
Total Equity 446,917 368,904
Total Liabilities and Equity 1,024,039 835,190
FIGURE 2-2 Balance Sheet for Big W Construction

sheet in Figure 2-2 comes from account number 110 from the are tied up in the form of retention, whose release is contin-
chart of accounts shown in Figure 2-1. To prevent the balance gent on the completion of construction projects.
sheet from becoming too complicated, multiple accounts may
be summarized by combining two or more consecutive ac- Inventory: Inventory includes materials that are
counts into a single line on the balance sheet. Other items on available for sale or are available and expected to be incor-
the balance sheet may be calculated from other lines on the porated into a construction project within the next year.
balance sheet. For example, the Total Current Assets is the Many construction companies have little or no inventory.
sum of the Cash, Accounts Receivable-Trade, Accounts Subcontractors are the most likely group of contractors to
Receivable-Retention, Inventory, Costs and Profits in Excess carry inventory.
of Billings, Notes Receivable, Prepaid Expenses, and Other
Current Assets or accounts 110 through 199 on the chart of Costs and Profits in Excess of Billings:
accounts in Figure 2-1. Not all companies will use all the ac- Costs and profits in excess of billings may also be referred to
counts shown in Figure 2-1. For example, the construction as costs and estimated earnings in excess of billings or under-
company in Figure 2-2 does not use the inventory account. billings. Construction companies using the percentage-of-
On the balance sheet, the relationship between assets, completion accounting method are required to recognize the
liabilities, and equity is as follows: estimated profits on a construction project as the project is
being completed rather than at the completion of the project.
Assets ⫽ Liabilities ⫹ Equity (2-1)
In these situations, the estimated profits must be equally dis-
tributed over the entire project based on the expected cost
Assets of the project. Costs and profits in excess of billings occur
Assets are those resources held by the company that will when the company bills less than the costs incurred plus the
probably lead to some future cash inflows. For example, a estimated profits or earnings associated with the completed
piece of property is an asset because it could be sold to pro- work. If the billings are in excess of the costs and estimated
duce a cash inflow. A pallet of custom-designed framing profits, the difference is recorded as a liability under the bill-
brackets left over from a job would not be considered an ings in excess of costs and profits category. Costs and profits
asset unless there was a reasonable chance that the brackets in excess of billings can be the result of cost overruns on the
could be used on a future job for which the company would completed work or as a result of the profit not being equally
be paid to build. Assets are divided into three broad catego- spread over the items listed on the schedule of values, as is the
ries: current assets, long-term assets, and other assets. case when the job has been front-loaded. For companies using
Current assets are the most liquid assets. Current assets the completed contract accounting method, this category is
are those assets that are expected to be converted to cash, replaced with a category entitled cost in excess of billings. For
exchanged, or consumed within one year. Common current companies using the cash or accrual accounting method, this
assets include cash, accounts receivable, inventory, cost and category is not included on the financial statements.
profit in excess of billings, notes receivable, due from con-
struction loans, prepaid expenses, and other assets. Let’s Notes Receivable: Notes receivable includes all
look at what would be included in each of these categories. invoices due to the company that will likely be paid within
one year and have been formalized by a written promise to
Cash: Cash includes demand deposits (such as savings pay. Invoices, short-term loans, or advances to employees
and checking accounts), time deposits (such as certificates of that have been formalized by a written promise to pay and are
deposits) with a maturity of one year or less, and petty cash. likely to be paid within a year are considered notes receivable.
Accounts Receivable: Accounts receivable are Due from Construction Loans: Due from
invoices owed to the company that will likely be paid within construction loan is money that is available from construc-
one year and have not been formalized by a written promise tion loans and is equal to the difference between the amount
to pay, such as a note receivable. For construction compa- of the loan and the amount that has been withdrawn from
nies, the monthly bills or draws to the owners of the con- the loan.
struction projects constitute an account receivable until the
bill is paid. When retention is held, it is common practice to Prepaid Expenses: Prepaid expenses are pay-
divide the accounts receivable into two categories: accounts ments that have been made for future supplies and services.
receivable-trade and accounts receivable-retention. The Examples of prepaid expenses include prepaid taxes, insur-
retention that is being held by the project’s owner for which ance premiums, rent, and deposits.
the company has not met the requirements for its release
is recorded in the accounts receivable-retention category. Other Current Assets: Other current assets are
The monthly bills—less retention—and retention for which all current assets not recorded elsewhere.
the company has met the requirements for its release are
recorded in the accounts receivable-trade category. This sep- Total Current Assets: Total current assets rep-
aration lets management quickly see which of the receivables resent the total value of the current assets.
16 CHAPTER TWO
Fixed and other assets include assets with an expected Accounts Payable: Accounts payable are debts
useful life of more than one year at the time of their pur- that the company owes and expects to pay within one year
chase. Fixed assets are recorded on the balance sheet at their that are not evidenced by a written promise to pay. For con-
purchase price and, with the exception of land, are depreci- struction companies the monthly bills that they receive from
ated for financial purposes. Fixed and other assets include their suppliers and subcontractors constitute accounts pay-
fixed assets, accumulated depreciation, net fixed assets, and able until the bill has been paid. When retention is withheld
other assets. Let’s look at what would be included in each of from the subcontractor payments, it is common practice to
these categories. divide accounts payable into two categories: accounts pay-
able-trade and accounts payable-retention. The retention
Fixed Assets: On the balance sheet shown in Figure that is being withheld from the supplier’s or subcontractor’s
2-2, the fixed assets have been broken down into the fol- payments on projects where the requirements for release of
lowing categories: land, buildings, construction equipment, the retention have not been met is recorded in the accounts
trucks and autos, and office equipment. Land and buildings payable-retention category. The monthly bills from the sup-
include all real property (real estate) owned by the com- pliers and subcontractors, less retention, and retention on
pany. Construction equipment includes heavy construction projects where the requirements for release of the retention
equipment, such as excavators and dump trucks, and other have been met are recorded in the accounts payable-trade
depreciable construction tools, such as compressors. Trucks category. The separation of these two categories allows man-
and autos include pickup trucks and automobiles used by agement to see quickly how much of its accounts payable are
office and field personnel. Office equipment includes all being held until the requirements for the release of retention
depreciable office equipment and furnishings such as desks have been met.
and computers. These subcategories are then summed up to
get the total fixed assets. Billings in Excess of Costs and Profits:
Billings in excess of costs and profits may also be referred to
Accumulated Depreciation: The losses in as billings in excess of costs and estimated earnings or over-
value to date of the fixed assets are recorded as accumulated billings. Billings in excess of costs and estimated profits is the
depreciation. The depreciation method used in financial opposite of costs and profits in excess of billings. Construction
statements may be different from the depreciation method companies using the percentage-of-completion accounting
used for tax purposes. The depreciation taken for a fixed method are required to recognize the estimated profits on a
asset may never exceed the purchase price of the asset. construction project as the project is being completed rather
The accumulated depreciation account is a contra account than at the completion of the project. In these situations, the
because it is subtracted from another account. estimated profits must be equally distributed over the entire
project based on the expected cost of the project. Billings in
Net Fixed Assets: The net fixed assets equals the excess of costs and estimated profits occur when the com-
total fixed assets less the accumulated depreciation. The net pany bills more than the costs incurred plus the estimated
fixed assets is also known as the book values for all of the fixed profits or earnings associated with the completed work. If
assets or the value of the fixed assets on the accounting books. the costs and estimated profits are greater than the billings,
the difference is recorded as an asset under the costs and
Other Assets: Other assets include assets not else-
profits in excess of billings category. Billings in excess of
where classified. Common other assets include inventory
costs and profits can be the result of cost savings on the
that will not be sold within a year, investment in other com-
completed work or as a result of the profit not being
panies, and the cash value of life insurance policies.
equally spread over the items listed on the schedule of val-
ues. For companies using the completed contract method,
Total Assets: Total assets represent the total value
this category is replaced with a category entitled billings in
of the current, fixed, and other assets.
excess of costs. For companies using the cash or accrual
accounting method, this category is not included on the
Liabilities
financial statements.
Liabilities are obligations for a company to transfer assets or
render services at some future time for which the company Notes Payable: Notes payable includes all debts
is already committed to. Loans and warranty reserves are that will likely be paid within one year and have been for-
common liabilities. Liabilities are divided into two broad malized by a written promise to pay.
categories: current liabilities and long-term liabilities.
Current liabilities are those liabilities that are expected Accrued Payables: Accrued payables are monies
to be paid within one year. Current assets are usually used to owed for supplies and services that have not been billed. They
pay current liabilities. Current liabilities include accounts include accrued taxes, rents, wages, and employee vacation
payable, billings in excess of costs and estimated earnings, time that have not been paid. For example, from the time an
notes payable, accrued payables, capital lease payments, employee’s hours are entered into the accounting system until
warranty reserves, and other current liabilities. the payroll check is prepared, the wages due to the employee
are recorded as an accrued payable. On the balance sheet in THE INCOME STATEMENT
Figure 2-2, the accrued payables have been broken down into
accrued payables, accrued taxes, and accrued vacation. The income statement shows a company’s revenues, ex-
penses, and the resulting profit generated over a period of
Capital Lease Payable: Capital leases must be time. Income statements span a period of time between two
recorded as a liability. Capital leases include all leases that balance sheets and record all transactions that occur during
are noncancelable and meet at least one of the following the period. Income statements are commonly prepared for
conditions: (1) the lease extends for 75% or more of the each month and the fiscal year. A typical income statement
equipment or property’s useful life, (2) ownership transfers for a construction company using the percentage-of-com-
at the end of the lease, (3) ownership is likely to transfer at pletion accounting method is shown in Figure 2-3.
the end of the lease through a purchase option with a heavily The income statement includes the following items:
discounted price, or (4) the present value of the lease pay- revenues, construction costs, equipment costs, overhead,
ments at market interest rates exceeds 90% of the fair market other income and expense, and income tax. The income
value of the equipment or property. statement reports the value of each of the accounts in the
income statement portion of the chart of accounts. Like the
Warranty Reserves: Warranty reserves are funds balance sheet, multiple accounts on the income statement
set aside to cover the foreseeable cost of warranty work. may be combined and unneeded accounts left out.
When a company has a foreseeable expense associated with
providing warranty work on a completed construction Revenues
project, the foreseeable expenses should be included as a Revenue is the income recognized from the completion of
liability on the balance sheet. Many homebuilders should be part or all of a construction project. For a company using the
able to forecast their expected warranty costs based on past
warranty experience.
BIG W CONSTRUCTION
Other Current Liabilities: Other current liabil- INCOME STATEMENT
ities include all other current liabilities that are not recorded REVENUES 3,698,945 100.0%
elsewhere.
CONSTRUCTION COSTS
Total Current Liabilities: Total current liabili- Materials 712,564 19.3%
ties represent the sum of all the current liabilities. Labor 896,514 24.2%
Subcontract 1,452,352 39.3%
Long-term Liabilities: Long-term liabilities Equipment 119,575 3.2%
include all debts that are not expected to be paid within one Other 5,452 0.1%
Total Construction Costs 3,186,457 86.1%
year. Common long-term liabilities include loans.
EQUIPMENT COSTS
Total Liabilities: Total liabilities represent the total
Rent and Lease Payments 35,425 1.0%
of both current and long-term liabilities. Depreciation 32,397 0.9%
Repairs and Maintenance 21,254 0.6%
Owner’s Equity Fuel and Lubrication 29,245 0.8%
Taxes, Licenses, and Insurance 1,254 0.0%
Owner’s equity is the claim of the company’s owner or
Equipment Costs Charged to Jobs 119,575 3.2%
shareholders on the assets that remain after the liabilities are Equipment Costs Charged to Employees 0 0.0%
paid. Owner’s equity may also be referred to as net worth. Total Equipment Costs 0 0.0%
Owner’s equity is recorded differently on the balance sheet
for corporations, sole proprietors, and partnerships. GROSS PROFIT 512,488 13.9%
For corporations the owner’s equity is commonly broken
down into three categories: capital stock, retained earnings, OVERHEAD 422,562 11.4%
and current period net income. The capital stock represents
NET PROFIT FROM OPERATIONS 89,926 2.4%
the initial investment in the company by the shareholders.
The retained earnings represent prior accounting period’s
OTHER INCOME AND EXPENSE 21,521 0.6%
profits or earnings retained by the corporation to invest in
company operations rather than be distributed to the share- PROFIT BEFORE TAXES 111,447 3.0%
holders. The current period net income represents the profits
or losses incurred during the current accounting period. INCOME TAX 33,434 0.9%
For sole proprietors the owner’s equity is listed as a sin-
gle sum and is known as the owner’s capital. For partner- PROFIT AFTER TAXES 78,013 2.1%
ships, the owner’s equity is listed for each partner separately
and is known as owner’s capital. FIGURE 2-3 Income Statement for Big W Construction
18 CHAPTER TWO
percentage-of-completion or accrual accounting methods, and concrete. The transportation and storage of the materi-
revenue is recognized at the time the project’s owner is billed als should be included in the cost of the materials as well as
for the work. For a company using the completed contract any sales tax on the purchase. The materials cost type does
method, revenue is recognized at the completion of the project. not include any labor for the installation of the material.
For a company using the cash method, revenue is recognized Purchases that include labor would be considered a subcon-
when the company is paid for the work by the project’s owner. tract cost type.
Revenue may also be referred to as contract revenue on a con-
struction company’s income statement and is equivalent to net Labor: The labor cost type includes only the labor
sales used by other industries. Income from nonconstruction that is processed through the construction company’s pay-
operations is usually classified as other income. roll system and is charged to a construction project. Labor
includes all labor burden costs, including social security,
Construction Costs Medicare, Federal Unemployment Tax (FUTA), State
Unemployment Tax (SUTA), vacation allowance, company-
Construction costs include both direct costs and indirect
paid health insurance, company-paid union fees, and other
costs. Construction costs are the same as cost of sales in
company-paid benefits. Labor that does not pass through
other industries.
the company’s payroll system, including temporary labor
Direct costs are the cost of materials, labor, and equip-
services, would be considered a subcontract cost type. When
ment that are incorporated into the construction of a project.
the labor cost type is separated into labor and labor burden,
Direct costs can be specifically identified to the completion of
the employee’s wages would be considered a labor cost type,
a specific construction component of a specific construction
whereas all burden costs would be considered a labor bur-
project, such as a wall, a road, a tree, and so forth. Direct
den cost type.
costs include the cost of all materials incorporated into the
completed construction project and the cost of the labor and
Subcontract: The subcontract cost type includes
equipment to install them. For example, for the task of in-
work that is performed by subcontractors for a construction
stalling a door, the direct costs would include the materials
project. The subcontract cost type must always include labor
cost for the door—including sales tax and delivery costs—
being performed by the subcontractor on the jobsite and may
and the labor cost with burden to install the door. Most work
include the supplying of materials, equipment, and other
in Divisions 2 through 49 of the MasterFormat3 is specified
items. The subcontract cost type does not include labor that
as direct costs. The key is that direct costs can be billed to a
is processed through the contractor’s payroll system.
specific component of a specific project.
Indirect costs consist of those costs that can be specifi-
Equipment: The equipment cost type includes
cally identified to the completion of a specific construction
equipment costs that have been charged to a construction
project but cannot be identified with the completion of a
project. These charges come from the equipment cost sec-
specific construction component on that project. Indirect
tion of the income statement. When equipment is charged
costs may also be referred to as indirect project costs, project
directly to the construction costs section of the income state-
overhead, or direct overhead costs. For example, job super-
ment it should be categorized as an other cost type or the
vision and the jobsite trailer are indirect costs. Although
company should break the equipment cost type into equip-
these costs are required to complete the construction project,
ment rented and equipment owned. When this is done,
they are not directly incorporated into the construction
the equipment that is charged directly to the construction
project. Most work in Division 1 of the MasterFormat is
costs section of the income statement is categorized as an
specified as indirect costs. The key is that indirect costs can
equipment rented cost type, whereas charges coming from
be billed to a specific project but cannot be billed to a spe-
the equipment cost section of the income statement are cat-
cific component on the project.
egorized as an equipment owned cost type. This separation
All construction costs should be charged to a specific con-
is necessary to maintain checks and balances between the
struction project. Construction costs are commonly broken
general ledger and the equipment ledger. When a company
down into five types or groups that include materials, labor,
does not use the equipment portion of the income state-
subcontract, equipment, and other costs. Some companies
ment, all equipment costs are charged directly to the jobs as
break labor down into labor and labor burden and equipment
an equipment cost type and there is no need to break down
down into equipment rental and equipment owned. One rea-
the equipment category.
son for this breakdown is that a company often pays a different
liability insurance rate on each of these types of costs.
Other: The other cost type includes all costs that are not
classified as labor, materials, equipment, or subcontract cost
Materials: The materials cost type includes supplies
types and are performed on a construction project. Other
or material that are purchased by the company and incor-
costs include services (such as surveying, temporary toilets,
porated into the finished project, such as lumber, windows,
and utilities) and materials that are not incorporated into
3
MasterFormat is a registered trademark of Construction Specification the construction project (such as materials used on tempo-
Institute (CSI). rary office facilities).
Equipment Costs licenses, and insurance were $3,200 per month and whose
preventative maintenance, fuel, and lubrication were $35 per
When equipment is used on multiple construction projects billable hour. During the month of April the tires were re-
the allocation of equipment costs to construction jobs is placed on the loader at a cost of $6,000. No other costs were
much more complicated than the billing of materials, labor, incurred during the year. The loader was only used during
and subcontractor’s services. When equipment is used on a the months of April through October. The monthly costs
single construction project, all costs go to the project. When a and billable hours by job are shown in Table 2-1.
construction company spends $5,000 on tires for a front-end If a company were to bill the monthly costs to the jobs
loader that is used on dozens or maybe hundreds of jobs dur- the loader worked on during the month, the monthly costs
ing the life of the tires, it becomes unclear which construction for the months of January, February, March, November,
project should be charged for the costs of the tires. Suppose and December would go unbilled. During the remaining
the front-end loader was used on a construction project for months the average hourly cost ranged from $52.78 to
two days. After the first day the company’s maintenance per- $150.00 per hour. To more evenly distribute the costs and
sonnel came to the project and changed the tires on the front- to ensure all costs incurred during the year are billed to
end loader. Even though the costs associated with the new jobs, the monthly costs are charged to the equipment cost
tires occurred while the front-end loader was on the project, portion of the income statement in the month they are in-
it would be unfair to charge the entire cost of the tires to the curred, and then the costs are allocated based on a projected
project. To do so would skew the costs of the project and hourly cost of the equipment and the billable hours to each
render the data obtained from the accounting systems less project. Suppose the company in the above example were to
meaningful. To fairly handle construction equipment costs, project that the hourly cost of the loader was $80 per hour.
the costs must be allocated. The equipment costs portion of During January, February, and March the monthly costs
the income statement is where these costs are held until they would be recorded to the equipment cost portion of the in-
can be allocated to specific projects. In the case of the front- come statement, whereas no costs would be allocated to the
end loader, the cost of the tires would be recorded under jobs. At the end of March, the equipment cost portion of
equipment costs and then would be allocated to the individ- the income statement would have a balance of $9,600 in un-
ual jobs based on the project’s usage of the equipment. allocated costs. During April $12,000 would be billed to the
The equipment cost portion of the income statement is equipment cost portion of the income statement and $6,400
a unique feature of income statements for construction of these costs would be allocated to Job 101. This would
companies that own their own equipment. Equipment costs continue through October, when at the end of the month
are considered construction costs that have yet to be allo- the equipment cost portion of the income statement would
cated or charged to specific projects and should not be con- be overallocated by $7,900. November and December’s
fused with company overhead costs. Some companies and costs would reduce this overallocation to $1,500. This re-
accountants require that all of the equipment costs be allo- maining overallocation at the end of December is due to the
cated by the end of the company’s fiscal year. fact that the actual hourly cost was $78.53 per hour rather
Let’s look at how the equipment section of the income than the project cost of $80 per hour.
statement works. Suppose that your company had a front- Equipment costs are often broken down into the fol-
end loader whose ownership costs for depreciation, taxes, lowing categories: rent and lease payments; depreciation;
Table 2-1 Loader Costs
Month Ownership Costs ($) Hourly Costs ($) Tires ($) Billable Hours by Job Average Hourly Cost ($)
January 3,200 0 0 0 ?
February 3,200 0 0 0 ?
March 3,200 0 0 0 ?
April 3,200 2,800 6,000 80 hr on Job 101 150.00
May 3,200 6,300 0 80 hr on Job 101 52.78
100 hr on Job 102
June 3,200 6,300 0 180 hr on Job 102 52.78
July 3,200 6,300 0 180 hr on Job 102 52.78
August 3,200 6,300 0 180 hr on Job 102 52.78
September 3,200 6,300 0 180 hr on Job 102 52.78
October 3,200 1,400 0 40 hr on Job 102 115.00
November 3,200 0 0 0 ?
December 3,200 0 0 0 ?
20 CHAPTER TWO
repairs and maintenance; fuel and lubrication; taxes, li- Equipment Costs Charged to Jobs: The
censes, and insurance; equipment costs charged to jobs; and equipment costs charged to jobs category is a contra account
equipment charged to employees. They may also be broken used to record the equipment costs that have been allocated
down in other ways. or charged to the construction costs for a specific construc-
tion project. Equipment costs charged to jobs offset the cost
Rent and Lease Payments: Rent and lease categories in the equipment cost section of the income state-
payments include the rental fees and lease payments for the ment in the same way depreciation offsets the fixed assets on
use of equipment not owned by the construction company. the balance sheet.
Equipment that is rented or leased for a specific job may be
billed directly to the job as equipment rented or other cost Gross Profit: Gross profit equals the revenues less
type rather than being processed through the equipment cost the construction costs and equipment costs.
portion of the income statement and subsequently allocated.
Overhead
Depreciation: Depreciation includes the loss in
value of company-owned equipment over its useful life. Overhead costs are those costs that cannot be charged to a
The depreciation method used for allocating construction specific construction project or be included in the equipment
costs may be different from the depreciation method used costs section of the income statement. Overhead is often re-
for income tax purposes. Amortization of capital leases is ferred to as general overhead, general and administrative ex-
included with depreciation costs. Depreciation methods are pense, or indirect overhead. Because the term project overhead
discussed in detail in Chapter 5. is often used to describe indirect costs, this book often uses the
term general overhead in place of overhead to avoid confusion.
Repairs and Maintenance: Repairs and main- In other businesses, general overhead is often referred to as
tenance include repairs, routine maintenances, and the replace- operating expenses. General overhead includes all main office
ment of tires and other wear items. Repairs include repairs and supervisory costs that cannot be billed to a specific con-
because of damage and abuse and other major repairs (such as struction project. General overhead is discussed in detail in
overhauls) to extend the life of the equipment. Routine main- Chapter 9. Some large companies may be required to allocate
tenance includes all regularly scheduled or preventative main- general overhead to the individual construction projects.
tenance and includes oil and filter changes. Tires and other
wear items include the replacement of tires, cutting edges, Net Profit from Operations: Net profit from
bucket teeth, and other items that frequently wear out. Repair operations equals the gross profit less the overhead and also
and maintenance costs should include the materials, supplies, equals the revenues less the construction costs, equipment
and labor involved in the repairs and maintenance. costs, and overhead.
Fuel and Lubrication: Fuel and lubrication Other Income and Expenses
includes the fuel used to operate the equipment and lubri- Other income and expenses is a catchall category that includes
cants consumed on the job, such as grease for the grease fit- all income and expenses not associated with construction op-
tings. Lubricants added by the operator at the beginning of erations. A common source of other income and expenses is
each shift are included in fuel and lubrication. interest and the operation of a rental property.
Taxes, Licenses, and Insurance: Taxes Profit Before Taxes: Profit before taxes or
include all taxes and licensing fees assessed by government before-tax profit equals the net profit from operations less
agencies. This includes property taxes on the equipment other income and expenses.
and licensing fees for vehicles that travel over public roads.
Insurance includes automotive and inland marine insur- Income Tax
ance, which protects the company against loss or damage
to the equipment and the damage caused by the use of the Income tax consists of income tax liabilities as well as de-
equipment. ferred income taxes. Income tax consists of income taxes
levied by the federal, state, and local governments. Some
Equipment Costs Charged to Employees: companies pay income taxes at the corporate level, whereas
The equipment costs charged to employees includes all other companies pass their tax liability on to their share-
costs reimbursements from employees for the personal use holders. Deferred income tax occurs when a construction
of company vehicles. Employees must be charged for per- company uses a different accounting method for income
sonal use of company vehicles—including travel to and tax purposes than it does for financial purposes. For exam-
from work—or the company must include the value of the ple, a company may use the cash accounting method for
employees’ use of company vehicles as a taxable benefit income tax purposes because it allows the company to
in the employees’ benefit package. Like equipment costs defer income tax, but uses the percentage-of-completion
charged to jobs, equipment costs charged to employees is method for preparation of financial statements because
a contra account used to offset the cost categories in the this method provides the most accurate financial picture of
equipment cost section of the income statement. the company. In this case, the difference in the income tax
calculated using the cash method and the percentage-of- Historical

completion method would be reported on the financial Records
statement as deferred income tax. Income taxes are dis-
cussed in Chapter 13.
Actual Estimates
Profit After Taxes: Profit after taxes equals the Costs & Bids
profit before taxes less income taxes.
There are three key relationships that must be main-
tained in the general ledger. First, the sum of the asset ac-
counts on the balance sheet must equal the sum of the Budgets
liability and the equity accounts on the balance sheet. For a FIGURE 2-4 Cost Information Cycle
company using the chart of accounts in Figure 2-1, the sum
of accounts 110 through 299 must equal the sum of accounts
310 to 430. Second, the profit for the period reported on the bids, which are the basis for the budgets used in the job cost
income statement must equal the total revenue for the pe- ledger. This cost information cycle is depicted in Figure 2-4.
riod—including other income—less the sum of the ex- Although construction costs are recoded in the general
penses, including all construction costs, equipment costs, ledger, the general ledger lacks the necessary details to meet
overhead costs, other expenses, and income tax. For the these two needs. These needs are met through the job cost
company using the chart of accounts in Figure 2-1, the profit ledger. The job cost ledger tracks the costs for each project as
would be equal to the sum of accounts 500 and 910 less the well as individual components within each of the projects. The
sum of accounts 610 through 899, 920, and 950. Third, the job cost ledger tracks costs using a cost coding system based on
profit for any period must equal the change in equity for that a company’s work breakdown structure (WBS). Most account-
same period. For a company using the chart of accounts in ing systems allow for four levels of tracking: project, phase or
Figure 2-1, the change in equity would occur in accounts area, cost code, and cost type. A graphical representation of the
410 through 430. Changes in the equity that occur through- breakdown of the job cost ledger is shown in Figure 2-5.
out a period are usually recorded in the current period net The first level of breakdown is by project. Each construc-
income category and are then transferred to another equity tion project is assigned a project code and is tracked sepa-
category at the end of the period. rately. An easy way to set up project codes is to use the first
one or two digits of the project code to represent the year that
the project was started. The remaining digits are assigned
THE JOB COST LEDGER sequentially, starting with 1 for the first project of the year, 2
For management to monitor and control the cost of con- for the second project of the year, and so forth.
struction projects, the costs for each project must be tracked Each project may then be broken down into phases,
against a budget. Additionally, the costs recorded to the job which are assigned a number. The phases may be used to sep-
cost ledger become part of a company’s historical records. arate different structures within a project—such as different
These historical records are used to prepare estimates and apartment buildings within an apartment complex—or may
FIGURE 2-5 Breakdown of the Job Cost Ledger

22 CHAPTER TWO
be used to separate the costs into groups—such as site costs commercial contractor are found in Figure 2-6 and sample
versus building costs. Some companies may not separate the cost codes for a residential contractor are found in Figure 2-7.
projects into phases. A cost code often consists of two parts, with the first two
The phases—if phases are not used, the projects—are digits representing a group of codes and the remaining digits
then broken down into cost codes. Sample cost codes for a representing a cost category within that group. The job cost
COST CODES:
Code Description Code Description

01000 GENERAL REQUIREMENTS 09000 FINISHES
01100 Supervision 09050 Metal Studs
01400 General Labor 09100 Drywall
01600 Temporary Facilities 09200 Ceramic Tile
01700 Temporary Utilities 09300 Acoustical Treatment
01800 Temporary Phone 09400 Carpet & Vinyl
01900 Clean-Up 09800 Paint
09850 Wall Coverings
02000 EXISTING CONDITIONS
02050 Demolition 10000 SPECIALTIES
10400 Signage
03000 CONCRETE 10700 Toilet Partitions
03200 Under-slab Gravel 10800 Toilet & Bath Accessories
03300 Footing & Found.—Labor
03400 Footing & Found.—Conc. 11000 EQUIPMENT
03450 Concrete Pump 11100 Appliances
03500 Slab/Floor—Labor
03600 Slab/Floor—Concrete 12000 FURNISHINGS
03650 Light-Weight Concrete 12300 Cabinetry & Counter Tops
03700 Pre-cast Concrete 12350 Counter Tops
03900 Rebar 12500 Window Treatments
04000 MASONRY 14000 CONVEYING SYSTEMS

04100 Masonry 14100 Elevators
05000 METALS 20000 FIRE SUPPRESSION

05100 Structural Steel 21100 Fire Sprinklers
05300 Joist & Deck
05400 Misc. Steel 22000 PLUMBING
05900 Erection 22100 Plumbing
06000 WOOD, PLASTICS, & COMP. 23000 HVAC

06110 Rough Carpentry 23100 HVAC
06120 Lumber 23200 Gas Lines
06150 Trusses
06210 Finish Carpentry 26000 ELECTRICAL
26100 Electrical
07000 THERMAL & MOIST. PROT.
07100 Waterproofing 31000 EARTHWORK
07200 Insulation 31100 Grading & Excavation
07210 Foundation Insulation
07250 Fireproofing 32000 EXTERIOR IMPROVEMENTS
07300 Stucco 32100 Asphalt
07400 Siding 32200 Site Conc.—Labor
07450 Rain Gutters 32300 Site Conc.—Concrete
07500 Roofing 32400 Signage
07600 Flashings—Sheet Metal 32500 Landscaping
07700 Roof Specialties 32500 Fencing
07900 Caulking & Sealants 32600 Dumpster Enclosures
32900 Outside Lighting
08000 OPENINGS
08110 Metal Doors & Frames 33000 UTILITIES
08200 Wood Doors 33100 Sanitary Sewer
08300 Overhead Doors 33200 Water Line
08400 Store Fronts 33300 Storm Drain
08700 Hardware 33400 Gas Lines
08800 Glass & Glazing 33500 Power Lines
33600 Telephone Lines
FIGURE 2-6 Sample Cost Codes for a Commercial Contractor

COST CODES
Code Description Code Description

1000 GENERAL CONDITIONS 5000 BUILDING EXTERIOR
1100 Supervision 5100 Windows
1200 Building Permits 5110 Skylights
1210 Other Permits 5200 Exterior Doors
1220 Bonds 5210 Garage Doors
1300 Blueprints 5300 Masonry
1400 Surveying 5400 Siding
1500 Temporary Facilities 5410 Soffit and Fascia
1510 Temporary Power 5500 Stucco
1520 Temporary Toilets 5600 Roofing
1530 Temporary Water 5700 Gutters and Downspouts
1600 Telephone
1900 Warranty
6000 INTERIOR FINISHES
2000 SUBDIVISIONS 6100 Insulation
2100 Clearing 6150 Drywall
2110 Demolition 6200 Doors & Trim-Material
2200 Rough Grading 6210 Doors & Trim-Labor
2210 Fill and Earthen Materials 6300 Painting
2300 Water Lines 6400 Cabinets
2400 Sewer Lines 6410 Countertops
2500 Storm Sewer 6500 Flooring
2510 Retention Ponds 6550 Ceramic Tile
2600 Power Lines 6560 Marble
2610 Gas Lines 6600 Hardware
2620 Phone Lines 6610 Shower Doors and Mirrors
2630 CTV Lines 6620 Bathroom Accessories
2900 Amenities 6650 Appliances
6700 HVAC-Finish
3000 BUILDING EXC. & FOUND 6800 Plumbing-Finish
3100 Excavation and Backfill 6900 Electrical-Finish
3200 Footings
3300 Foundation 7000 SITE
3310 Window Wells 7100 Final Grade
3400 Rebar 7200 Driveways
3500 Plumbing-Underground 7210 Patios and Walks
3600 Slab-on grade 7300 Decks
3700 Waterproofing 7400 Fences
3800 Termite Protection 7500 Landscaping
7600 Pools
4000 STRUCTURE 7900 Clean-up
4100 Lumber-1st package
4110 Lumber-2nd package
4120 Lumber-Roof
4130 Lumber-Miscellaneous
4140 Trusses
4200 Steel
4300 Framing-1st package
4310 Framing-2nd package
4320 Framing-Roof
4330 Framing-Miscellaneous
4400 Fireplace
4500 HVAC-Rough
4600 Plumbing-Rough
4700 Electrical-Rough
FIGURE 2-7 Sample Cost Codes for a Residential Contractor
codes are often based on the Construction Specification when developing tasks to ensure each task has only one job
Institute’s MasterFormat or Uniformat. The job cost codes cost code, although there can be multiple tasks assigned to
provide standard categories for costs, which are used by one job cost code. The first two digits of the cost codes in
both the estimating and accounting departments to ensure Figure 2-6 correspond with the divisions of the 2010
that the costs are tracked the same way they are estimated. MasterFormat. The last three digits of the cost code loosely
The scheduling department uses the same job cost codes follow the MasterFormat. Modifications were made to the
24 CHAPTER TWO
overruns. The cost codes should not require bills from ven-
dors to be split up among different cost codes unless it is re-
quired for the tracking of costs, as is the case when invoices
are broken up by building or when plumbing is divided into
sub-rough (underground), rough, and finish. Splitting of in-
FIGURE 2-8 Sample Job Cost Code voices between job codes often leads to errors and inaccurate
historical costs and should be avoided when it does not fos-
MasterFormat numbers to prevent the cost codes from ter improved job cost control.
bunching up and to meet the individual needs of the com- The job cost coding system must match the way the com-
pany. Not all of these cost codes are used for every job—only pany buys out a construction project and tracks the costs on
those codes for which costs have been budgeted. the project. Looking at the cost codes in Figure 2-6, we see that
The cost codes are then broken down into a cost type. 32200 Site Conc.-Labor and 32300 Site Conc.-Concrete have
Typically the cost types should match the types used on the been included under 3200 Exterior Improvements. The cost
income statement. In the case of the income statement in codes have been set up this way so that building costs could be
Figure 2-3, the cost types would be materials, labor, subcon- easily separated from the site costs. In this case, the building
tracts, equipment, and other. costs are 3000 Concrete through 26000 Electrical. Additionally,
A complete cost code—consisting of the job number, the contractor uses both subcontractors and in-house crews to
phase code, cost code, and cost type—is used to describe form and pour the site concrete, but the contractor always pro-
each account on the job cost ledger. The job cost code may vides the concrete. By separating the forming and pouring
be written as shown in Figure 2-8. The three numbers to the costs from the concrete costs, the contractor can easily com-
left of the first decimal point represent the job number, pare the cost of using a subcontractor to the cost of using in-
the two numbers between the decimal points represent the house crews by charging all costs usually paid by the
phase code, the five numbers to the right of the second deci- subcontractor to 32200 Site Conc.-Labor when the company’s
mal point represent the cost code, and the last alphanumeric crews pour the concrete. For example, if the concrete subcon-
character represents the cost type. For the company using tractor typically includes the costs of tie wire, form oil, and
the income statement in Figure 2-3, the cost types would be other materials in his/her bid, when the company uses in-
M, L, S, E, and O, representing materials, labor, subcon- house crews to pour the concrete, these costs would be billed
tracts, equipment, and other. The job cost code of to 32200M, the materials portion of the 32200 Site Conc.-
102.01.07200L for a company using the cost codes in Figure Labor cost code. Similarly, equipment costs incurred by the in-
2-6 would represent the labor component for the insulation house crew would be billed to 32200E and labor costs would be
work on Phase 1 of Project 102. Delimiters other than dots, billed to 32200L, the equipment and labor portion of the 32200
such as dashes, may be used in the job cost code. For exam- Site Conc.-Labor cost code. Materials that are provided by the
ple, the previous code could be written 102-01-07200L. contractor regardless of who is performing the labor (subcon-
For the job cost coding system to work, the system must tractor or in-house) are billed to 32300M, the materials por-
be standardized, follow a common-sense format, match the tion of the 32300 Site Conc.-Concrete cost code. This makes it
way the company does business, and allow for expansion. It possible for management to directly compare the cost of per-
is also important that all parties who use the system—estima- forming the work in-house to hiring a subcontractor to per-
tors, field employees, the accounting department, and man- form the work, by comparing the costs recorded to 32200 Site
agement—must be using the same coding and must be Conc.-Labor on one job where the concrete was poured by an
consistent in how items are coded. If field employees code in-house crew to the costs recorded to 32200 Site Conc.-Labor
framing hardware to a different code than the estimators, on a second and similar job where the concrete was poured by
tracking the project’s costs against the estimator’s budget will a subcontractor. If the materials costs for tie wire, form oil, and
be of little use when trying to manage costs, and cost data so forth were mixed with concrete costs, it makes it difficult to
from past projects will be of little use to the estimating de- make a direct comparison.
partment when bidding future projects. For this consistency Finally, the system must allow for expansion. Companies
to occur there must be a written, companywide standard that often set up a coding system to fit their current business op-
explains the coding system and how items are to be coded. erations. Later, they find that their business has expanded,
This document should include a list of the cost codes with a requiring additional codes that cannot be supported by their
description of what is to be included in each cost code. current coding system. The company then must change its
Developing a job cost coding system that follows an coding system, which leads to confusion and coding prob-
easy, commonsense format makes it easier to ensure that lems. Common mistakes in this area are not leaving enough
items are coded correctly and are easy to use for cost control. space between cost codes to allow for the addition of cost
A hard-to-follow format will create confusion and increase codes between two codes and not setting up the project and
the number of coding errors. The coding systems should be phase codes with enough places to allow for the increase in
set up so that only one vendor or subcontractor is coded to the number of projects or phases.
any one of the cost codes, thereby making it easy to deter- For the job cost ledger to be of use, budget must be re-
mine which vendor or subcontractor is responsible for costs corded for each cost code. These budgets come from the cost
estimate for the project that was generated when the project was ledger with an equipment cost type, and 650 Other must
bid and must be updated when changes occur. Whenever a cost equal the total of all costs on the job cost ledger with an
is recorded to the general ledger as a construction cost, it should other cost type for a specific period. Again, committed costs
also be recorded to the job cost ledger. Many job cost ledgers that have not been recognized as expenses are not included
also allow revenues to be credited to individual jobs. Many job in these calculations. At the end of each month, the compa-
cost ledgers allow the company to track committed costs. ny’s accountant should verify that these relationships are
Committed costs should be tracked to get a more accurate pic- being adhered to and make the necessary corrections. It is
ture of the project’s financial status. If the job cost ledger does important to note that the costs on the job cost ledger span
not allow for the tracking of committed costs, the project’s multiple months or years (from the start of the projects to
management should perform these calculations on a regular the end of the projects); therefore, the cost comparison be-
basis. Committed costs are discussed in detail in Chapter 4. tween the job cost ledger and the general ledger must only
Two key relationships must be maintained between the include the costs recorded during a specific accounting pe-
general ledger and the job cost ledger. First, the total of the riod (month, quarter, or year).
revenue on the job cost ledger must equal the revenue from
the core business—exclusive of interest received and other
income—on the income statement for a specific period of
THE EQUIPMENT LEDGER
time. For the company using the chart of accounts in Figure
2-1, the amount in account 500 Revenue must be equal to Many construction companies have major investments in
the total revenue recorded on the job cost ledger for the pe- equipment that is moved from job to job. Some equipment,
riod. Second, the total of the costs—exclusive of committed such as a dump truck, may be on multiple jobs during one
costs that have not been recognized as an expense—on the day. For a construction company to effectively manage
job cost ledger must equal the construction costs on the in- equipment and to ensure that the equipment costs are being
come statements for a specific period of time. billed to projects and that they are making enough money
The total in each of the five subcategories—labor, mate- on each piece of equipment to warrant the investment in the
rial, equipment, subcontract, and other—on the job cost equipment, the costs and billings for each piece of equip-
ledger must equal the construction costs on the general ment must be tracked. This tracking is accomplished
ledger in the associated account for any given period. For the through the equipment ledger.
company using the chart of accounts in Figure 2-1, the The equipment ledger is broken down into two and
amount in accounts 610 Materials, 620 Labor, 630 sometimes three levels. A graphical representation of this
Subcontract, 640 Equipment, and 650 Other must equal the breakdown is shown in Figure 2-9. The first level of break-
costs recorded in the job cost ledger for the period. down is by piece of equipment. Each piece of construction
Additionally, 610 Materials must equal the total of all costs equipment is assigned a code and is tracked separately. The
on the job cost ledger with a materials cost type, 620 Labor equipment costs and equipment costs charged to jobs for
must equal the total of all costs on the job cost ledger with a each piece of equipment are tracked in the equipment ledger.
labor cost type, 630 Subcontract must equal the total of all The second level of breakdown is by the accounts found in
costs on the job cost ledger with a subcontract cost type, 640 the equipment section of the income statement. For the com-
Equipment must equal the total of all costs on the job cost pany using the chart of accounts in Figure 2-1, these accounts
FIGURE 2-9 Breakdown of the Equipment Ledger

26 CHAPTER TWO
include 710 Rent and Lease Payments; 720 Depreciation; 730 Costs Charged to Jobs for the year. Second, the costs on the
Repairs and Maintenance; 740 Fuel and Lubrication; and 750 equipment ledger must equal the total of the equipment cost
Taxes, Licenses, and Insurance. Also, at this level the equip- on the income statement—exclusive of the contra ac-
ment costs charged to the job are tracked. For the company counts—for a specific accounting period. For the company
using the chart of accounts in Figure 2-1, the costs charged to using the chart of accounts in Figure 2-1, the costs recorded
employees and jobs is recorded in accounts 798 and 799, re- in the equipment ledger must be equal to the costs in ac-
spectively. The third level of breakdown is where an account counts 710 Rent and Lease Payments; 720 Depreciation; 730
from the income statement is broken down into smaller ac- Repairs and Maintenance; 740 Fuel and Lubrication; and
counts. For example, in Figure 2-9, Repairs and Maintenance 750 Taxes, Licenses, and Insurance for the period.
is broken down into repairs, maintenance, and tires. This al- Additionally, 710 Rent and Lease Payments from the income
lows for more detailed tracking. statement must equal the total of all of the cost in the rent
Two key relationships must be maintained between the and lease payment category for all of the equipment in the
general ledger and the equipment ledger. First, the total of equipment ledger for a specific accounting period. The same
the costs allocated to jobs or employees on the equipment is true for the 720 Depreciation; 730 Repairs and
ledger must be equal to the equipment contra accounts on Maintenance; 740 Fuel and Lubrication; and 750 Taxes,
the income statement for a specific accounting period. For Licenses, and Insurance. Like the job cost ledger, the general
the company using the chart of accounts in Figure 2-1, the ledger spans multiple months or years; therefore, the cost
total of the costs allocated to jobs and employees on the comparison between the equipment ledger and the general
equipment ledger must equal the amount in accounts 798 ledger must include only the costs recorded during a specific
Equipment Costs Charged to Employees and 799 Equipment accounting period (month, quarter, or year).
Conclusion statements. Additionally, these companies are required to

recognize their estimated profits as they are earned, even if
For management to manage costs, the company’s accounting they have not yet received these profits.
system must provide cost data in time for management to
proactively respond to the data. For this to occur, the ac- Discussion Questions
counting system must have a strong job cost and equipment
tracking system, the data must allow management to manage
1. What are the purposes of the accounting system?
by exception, and the accounting data must be readily availa-
ble to all employees who are responsible for controlling costs. 2. What is the difference between cost reporting and cost
Construction accounting systems consist of a general control?
ledger and a job cost ledger. They also consist of an equip- 3. What are the key components of an accounting system
ment ledger when a company has heavy equipment or lots of that facilitate cost control?
vehicles. The general ledger is divided into two sections, the 4. What are the different accounting ledgers used by con-
balance sheet and the income statement, and is used to pre- struction companies and what are their purposes?
pare the balance sheet and income statement for the com-
5. What is the relationship among the chart of accounts,
pany. The job cost ledger provides a detailed breakdown of
the balance sheet, and the income statement?
the construction costs recorded on the income statement.
On the job cost ledger, costs are broken down by project, 6. Compare and contrast the different accounting meth-
phase (if desired), cost code, and cost type. The job cost ods that are available to construction companies.
ledger is used by construction managers to manage the costs 7. What are the key relationships that must be maintained
of the individual projects. The equipment ledger provides within the general ledger?
a detailed breakdown of equipment costs on the general 8. What are the key relationships that must be maintained
ledger, is broken down by individual pieces of equipment, between the general ledger and the job cost ledger?
and is used to manage heavy equipment and vehicles.
9. What are the key relationships that must be maintained
There are four methods of accounting available to
between the general ledger and the equipment ledger?
construction companies: cash, accrual, percentage of com-
pletion, and completed contract. Because long-term con- 10. An invoice is billed to 102.02.12500S. What does each
tracts—contracts that span more than one fiscal year—are component of this cost code mean?
very common in the construction industry, many construc- 11. Obtain a chart of accounts from a local construction
tion companies are required to use the percentage-of-com- company. Compare and contrast the company’s chart of
pletion method. When using the percentage-of-completion accounts with the chart of accounts in Figure 2-1. Does
method, companies are required to report their costs and the company’s chart of accounts have any accounts that
profits in excess of billing (underbillings) and billings in are not shown in Figure 2-1? If so, what are they and
excess of costs and profits (overbillings) on their financial what are they used for? What is the company’s core
market (e.g., commercial, residential, specialty contrac- c. Which of the company’s employees use data from
tor)? How does the company’s core market affect their the accounting system? How do they use this data?
chart of accounts? Come to class prepared to discuss d. What does it take to successfully operate the
your findings. accounting system?
12. Visit with a controller or accountant who works for a e. What happens when the accounting system is not
construction company. Discuss the following questions: functioning properly?
a. What role does the accounting system play in the Be sure to keep your interview to the allotted time and
success of the construction company? be gracious for his or her help. Within 48 hours of the
b. What data does the accounting system collect and interview, mail him or her a thank you note. Come to
how is it used? class prepared to discuss your findings.
C H A P T E R T H R E E
A C C O U N T I NG T RAN SAC T ION S
In this chapter you will gain a better understanding asset accounts and decrease the balance of liability and
of how different accounting transactions are proc- owners’ equity accounts, whereas credits decrease the bal-
essed in the accounting system. There are a number ance of asset accounts and increase the balance of liability
and owners’ equity accounts. The relationship between
of unique transactions that take place in construc-
debits and credits and the accounts on the balance sheet is
tion accounting that do not occur in other industries. shown in Figure 3-1.
Most of these transactions are a result of the con- To make it easier to understand how a transaction af-
struction industry’s focus on job costing, equipment fects the different accounts and how to maintain the rela-
tracking, and accounting for long-term contracts. tionships among the balance sheet, the income statement,
Understanding these transactions is important for the job cost ledger, and the equipment ledger, each transac-
tion is shown graphically as in Figure 3-2. This should not
three reasons: First, some project costs—such
be confused with the traditional T-accounts used in ac-
as labor burden and equipment costs—are often counting textbooks. In Figure 3-2, note that (1) the changes
generated by the accounting system rather than to the asset side of the balance sheet equals the changes to
an invoice or time card. Understanding how these the liabilities and equity side of the balance sheet; (2) the
costs are obtained will help you gain a better changes to the current period net income equals the changes
understanding of how to estimate these costs and to the profit; (3) the changes to the revenue side of the in-
come statement equals the changes to the expenses and
incorporate them in the financial analysis of the
profit side of the incomes statement; and (4) the changes to
project. Second, financial managers must review the materials cost on the income statement equals the
the accounting reports for errors—improperly billed changes to the materials costs on the job cost ledger.
costs and omitted costs—and ensure that the Everything is in balance. As we look at these transactions,
necessary corrections are made. Understanding we need to keep in mind the key relationships discussed in
how the costs are generated will help you better the previous chapter.
Let’s look at some common transactions that occur
understand how to interpret the accounting reports.
in construction companies. For these transactions we use
Finally, for the general manager and owner, under- the chart of accounts in Figure 2-1 and the cost codes in
standing construction accounting is necessary to Figure 2-6. The chart of accounts will also be broken into
ensure that the accounting system is set up to meet its two separate components: the balance sheet and the
the needs of the company. Many construction com- income statement. The following transactions are for
panies are using substandard accounting systems percentage-of-completion accounting, although they
may apply to other methods of accounting.
because management does not understand how
accounting systems should be structured to meet
the needs of the construction industry.
N
ow that we have looked at the different ledgers
used in a construction accounting system, it is im-
portant to understand how common construction
transactions affect the different ledgers and how the ledgers
are interrelated. These transactions may be referred to as
journal entries. Transactions or journal entries that occur
on the balance sheet portion of the general ledger consist of
both debits and credits, with the total of the debits equal-
ing the total of the credits. Debits increase the balance of FIGURE 3-1 Debits and Credits
28
Accounting Transactions 29
⫽
⫽ ⫽
FIGURE 3-2 Invoice Charged to a Job without Retention
INVOICE CHARGED TO A JOB INVOICE CHARGED TO A

WITHOUT RETENTION JOB WITH RETENTION
When a material, subcontract, or other cost type invoice that When a materials, subcontract, or other cost type invoice
is billable to a construction project—on which the contrac- that is billable to a construction project—on which the con-
tor will not hold retention from the payment—is received tractor will hold retention from the payment—is received
and entered into the accounting system, it affects the income and entered into the accounting system, it affects the income
statement, balance sheet, and job cost ledger. Most com- statement, balance sheet, and job cost ledger much the same
monly, this type of invoice is for materials. For discussion way as an invoice on which the contractor does not hold re-
purposes, we look at how a materials invoice is handled. On tention. The key difference is that the retention that will be
the income statement the materials invoice is recorded as a withheld must be recorded in the accounts payable-retention
cost in the material section of the construction costs. The account. Typically, these invoices are from subcontractors;
increase in the construction costs decreases the profit on the however, they may also be materials or other type invoices.
income statement by the amount of the invoice. This de- For discussion purposes, we look at how a subcontractor’s
crease in profit is not offset until revenues are recorded invoice is handled. On the income statement the subcontrac-
when the client is billed. On the balance sheet the materials tor’s invoice is recorded as a cost in the subcontract section of
invoice is recorded as an accounts payable-trade in the lia- the construction costs. The increase in the construction costs
bility section. This increase in liability results in a reduction decreases the profit on the income statement by the amount
in the current period net income equal to the amount of the of the invoice. On the balance sheet the retained portion of
invoice. As per the relationships previously discussed, the re- the subcontractor’s invoice is recorded in the accounts payable-
duction in profit on the income statement is equal to the retention account and the remaining portion of the in-
reduction in the current period net income on the balance voice is recorded in the accounts payable-trade account in
sheet. Recording an invoice creates a change in profit but the liability section of the balance sheet. These increases in
not a cash flow. On the job cost ledger the materials invoice liability result in a reduction in the current period net income
is recorded as a cost with a materials cost type against the equal to the amount of the invoice. As per the relationships
job, phase, and cost code for which the materials were pur- previously discussed, the reduction in profit on the income
chased. Subcontract and other types of invoices are handled statement is equal to the reduction in the current period net
the same way, except subcontract invoices are recorded as a income on the balance sheet. Recording an invoice creates a
subcontract cost type and other invoices are recorded as an change in profit but not a cash flow. On the job cost ledger,
other cost type. the subcontractor’s invoice is recorded as a cost with a sub-
contract cost type against the job, phase, and cost code for
Example 3-1: Determine the changes to the balance which the subcontractor performed the work. If the invoice
sheet, income statement, and job cost ledger of a $10,000 covers multiple cost codes, the invoice is divided among the
materials invoice for 7/16 OBS charged to cost code 06120 appropriate cost codes. Materials and other types of invoices
Lumber on Phase 1 of Job Number 110. The company are handled the same way, except materials invoices are re-
uses the chart of accounts in Figure 2-1. corded as a materials cost type and other invoice are recorded
Solution: The changes are shown in Figure 3-2. The cost as an other cost type.
code on the job cost ledger has an “M” suffix, indicating
that the cost is a materials cost type. Example 3-2: Determine the changes to the balance
sheet, income statement, and job cost ledger of a $10,000
The above example was for a single invoice. When in- subcontractor’s invoice for plumbing work charged to cost
voices are entered into the accounting system, a group or code 22100 Plumbing on Phase 1 of Job Number 110.
batch of invoices are entered and posted to the general and When paying the bill the contractor will withhold 10% reten-
job cost ledgers at the same time. tion. The company uses the chart of accounts in Figure 2-1.
30 CHAPTER THREE
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⫽ ⫽
FIGURE 3-3 Invoice Charged to a Job with Retention
Solution: The contractor will withhold $1,000 ($10,000 ⫻ Example 3-3: Determine the changes to the balance sheet
0.10) as retention until the project is complete. The changes that occur when the invoices in Examples 3-1 and 3-2 are
are shown in Figure 3-3. The cost code on the job cost led- paid. The retention will not be released at this time. The
ger has an “S” suffix, indicating that the cost is a subcon- company uses the chart of accounts in Figure 2-1.
tractor cost type. Solution: The contractor will use two checks drawn
against the cash account to pay $10,000 from Example 3-1
and $9,000 from Example 3-2, for a total of $19,000. The
PAYING INVOICES
changes are shown in Figure 3-4.
So far invoices have been entered into the accounting sys-
Multiple invoices from a single supplier or subcontrac-
tem, but they have not been paid. It is vital to recognize
tor may be paid with one check. Multiple checks for differ-
that recording an expense and paying an expense are two
ent suppliers and subcontractors may be prepared at the
separate transactions, which occur at different points in
same time in what is known as a check run.
time, often separated by weeks. When invoices are paid,
cash (an asset) is used to pay the accounts payable (a liabil-
ity). Payment of an invoice affects the balance sheet by re-
ducing the accounts payable-trade (a liability account) and
LABOR CHARGED TO A JOB
at the same time reducing the cash account (an asset ac- When an employee’s time—whose costs are to be charged
count). By reducing both an asset account and a liability to a project—is entered into the accounting system, it af-
account by the same amount, the relationship between as- fects the income statement, balance sheet, and job cost
sets and liabilities on the balance sheet is maintained. ledger. On the income statement, the employee costs—
Because the invoices have already been recorded as costs including labor burden—are recorded as a cost in the
on the income statement and the job cost ledger, no labor section of the construction costs. The increase in
changes occur on the income statement or job cost ledger; the construction costs decreases the profit on the income
likewise the reduction of profit has already been recog- statement by the total cost of the employee. On the bal-
nized and no changes in profit and current period net in- ance sheet the employee costs will become accrued liabili-
come occur when payment is made. Paying invoices creates ties. For a company using the chart of accounts in Figure
a negative cash flow. 2-1, the accrued liabilities have been broken down into
⫽
⫽ ⫽
FIGURE 3-4 Paying Invoices

five accounts: 340 Accrued Payroll, 341 Accrued Payables, Solution: The amount payable to the employee is re-
342 Accrued Taxes, 343 Accrued Insurance, and 344 corded in the 340 Accrued Payroll account on the balance
Accrued Vacation. The amount due to the employee— sheet. The amount payable to the employee equals wages
after withholdings and deductions—is recorded in the less deduction and withholdings taken from wages and is
340 Accrued Payroll account. Social security taxes, calculated as follows:
Medicare taxes, FUTA, and SUTA paid by the employer;
social security taxes and Medicare taxes paid by the em- Payable ⫽ Wages ⫺ Social Security Tax ⫺ Medicare Tax
ployee, and state and federal withholding taxes withheld ⫺ Federal Withholding ⫺ State Withholding
from the employee’s paycheck are recorded in the 342 ⫺ Health Insurance
Accrued Taxes account. Workers’ compensation insurance, Payable ⫽ $895.90 ⫺ $55.55 ⫺ $12.99 ⫺ $75.25
liability insurance, and health insurance costs are re- ⫺ $33.86 ⫺ $76.08
corded in the 343 Accrued Insurance account. Because it Payable ⫽ $642.17
is unfair to charge an employee’s vacation time to the
job he or she is working on when the employee takes va- Both the state and federal government taxes are recorded
cation, funds to pay for the employee’s vacation must be in the 342 Accrued Taxes account on the balance sheet.
accrued throughout the year. These funds are recorded in This includes both taxes paid by the employer and taxes
the 344 Accrued Vacation account. All other benefits withheld from the employee’s check. Find the amount pay-
would be recorded in the 341 Accrued Payables account. able to the state government:
This increase in liability on the balance sheet results in a
Payable ⫽ SUTA ⫹ State Withholding
reduction in the current period net income equal to the
total cost of the employee. As per the relationships previ- Payable ⫽ $26.88 ⫹ $33.86 ⫽ $60.74
ously discussed, the reduction in profit on the income
Find the amount payable to the federal government:
statement is equal to the reduction in the current period
net income on the balance sheet. Recording labor creates Payable ⫽ Social Security TaxEmployer
a change in profit but not a cash flow. On the job cost ⫹ Medicare TaxEmployer ⫹ FUTA
ledger the labor cost, including burden, is recorded as a ⫹ Social Security TaxEmployee
cost with a labor cost type against the job, phase, and cost ⫹ Medicare TaxEmployee ⫹ Federal Withholding
code for which labor was performed. If the employee per- Payable ⫽ $55.55 ⫹ $12.99 ⫹ $7.17 ⫹ $55.55
formed work on multiple cost codes, the labor is divided ⫹ $12.99 ⫹ $75.25
among the appropriate cost codes. The calculation of the
Payable ⫽ $219.50
burden costs (including social security tax, Medicare tax,
FUTA, SUTA, workers’ compensation insurance, general The total amount of taxes is $280.24 ($60.74 + $219.50).
liability insurance, health insurance, and retirement) is
The liability insurance, workers’ compensation insurance,
discussed in Chapter 8. The amount of accrued vacation
and health insurance costs are recorded in the 343 Accrued
is determined by multiplying the amount of vacation ac-
Insurance account on the balance sheet. Find the amount
crued during the pay period by the burdened wage rate
payable to the health insurance carrier:
(wages plus labor burden). The amount of vacation ac-
crued during the pay period is equal to the number of Payable ⫽ Health InsuranceEmployer
days (or hours) of vacation given each year divided by the ⫹ Health InsuranceEmployee
number of pay periods per year. Payable ⫽ $24.00 ⫹ $76.08 ⫽ $100.08
Example 3-4: Determine the changes to the balance sheet, Find the total recorded to the 343 Accrued Insurance
income statement, and job cost ledger of a finish carpenter account:
when his or her time is entered into the accounting sys-
tem. The finish carpenter is to be paid $895.90 for a week’s Total ⫽ Liability Insurance ⫹ Workers’ Comp.
work. The employer has the following labor burden costs: ⫹ Health Insurance
$55.55 for social security tax, $12.99 for Medicare, $26.88 Total ⫽ $8.96 ⫹ $71.67 ⫹ $100.08 ⫽ $180.71
for SUTA, $7.17 for FUTA, $8.96 for liability insurance,
$71.67 for workers’ compensation, $24.00 for the health in- The money set aside for vacation pay is recorded in the
surance premium, and $38.00 is set aside for vacation. The 344 Accrued Vacation account on the balance sheet. The
employee has the following withheld from his or her check: changes are shown in Figure 3-5. The cost code on the job
$55.55 for social security tax, $12.99 for Medicare, $75.25 cost ledger has an “L” suffix, indicating that the cost is a
as federal withholding, $33.86 for state withholding, and labor cost type.
$76.08 for the employee’s part of the health insurance pre- The above example was for a single time card. When
mium. The labor is charged to cost code 06210 Finish Car- time cards are entered into the accounting system, a group
pentry on Phase 1 of Job Number 112. The company uses or batch of time cards are entered and posted to the general
the chart of accounts in Figure 2-1. and job cost ledgers at the same time.
32 CHAPTER THREE
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⫽ ⫽
FIGURE 3-5 Labor Charged to a Job
LABOR CHARGED TO Example 3-5: Determine the changes to the balance sheet,
income statement, and job cost ledger of an estimator’s
GENERAL OVERHEAD
time when that time is entered into the accounting system.
When the time of an employee—whose costs are to be charged The estimator is paid $895.90 each week. The employer
to general overhead—is entered into the accounting system, it has the following burden costs: $55.55 for social security
affects the income statement and balance sheet. Because the tax, $12.99 for Medicare, $26.88 for SUTA, $7.17 for FUTA,
employee’s time is not charged to a job, it does not affect the $8.96 for liability insurance, $71.67 for workers’ compensa-
job cost ledger. On the income statement the employee costs, tion, $24.00 for the health insurance premium, and $38.00
including labor burden, are recorded as a cost in the general is set aside for vacation. The employee has the following
overhead section of the income statement. For a company amounts withheld from his or her check: $55.55 for social
using the chart of accounts in Figure 2-1, the employees’ labor security tax, $12.99 for Medicare, $75.25 as federal with-
costs are broken down into the following accounts: 820 holding, $33.86 for state withholding, and $76.08 for the
Employee Wages and Salaries, 821 Employee Benefits, 822 employee’s part of the health insurance premium.
Employee Retirement, 825 Employee Taxes, and 830 Solution: Because this example has the same wages and
Insurance. The total wages—before withholdings and deduc- costs as Example 3-4, the changes to the balance sheet are
tions are taken from the employee’s check—are recorded in the same for this example as they are for Example 3-4. The
the 820 Employee Wages and Salaries account. The health in- amount recorded in the 820 Employee Wages and Salaries
surance costs, vacation, and other benefits paid by the em- account equals the employee’s wages, which are $895.90.
ployer are recorded in the 821 Employee Benefits account.
The amount recorded in the 821 Employee Benefits ac-
Retirement paid by the employer is recorded in the 822
count equals the employer’s portion of the health insurance
Employee Retirement account. Social security taxes, Medicare
premium plus the funds set aside for vacation. These costs
taxes, FUTA, and SUTA paid by the employer are recorded in
are calculated as follows:
the 825 Employee Taxes account. Workers’ compensation in-
surance and liability insurance are recorded in the 830 Benefits Cost ⫽ Health Insurance Premium ⫹ Vacation
Insurance account. Health insurance premiums paid by the Benefits Cost = $24.00 ⫹ $38.00 ⫽ $62.00
employee, social security and Medicare taxes paid by the em-
ployee, and state and federal withholding taxes withheld from The state and federal taxes paid by the employer are re-
the employee’s paycheck are not recorded because they are corded in the 825 Employee Taxes account. Find the
costs to the employee and are taken out of the employee’s amount of taxes paid by the employer.
wages. The increase in the overhead costs decreases the profit Taxes ⫽ Social Security Tax ⫹ Medicare Tax ⫹ FUTA ⫹ SUTA
on the income statement by the cost of the employee, includ-
Taxes ⫽ $55.55 ⫹ $12.99 ⫹ $7.17 ⫹ $26.88 ⫽ $102.59
ing burden. On the balance sheet the employee costs becomes
an accrued liability and is handled the same way the costs for The liability and workers’ compensation insurance paid by
an employee whose costs are charged to a project were han- the employer are recorded in the 830 Insurance account.
dled (see Labor Charged to a Job). Recording labor creates a Find the amount of liability and workers’ compensation in-
change in profit but not a cash flow. The calculation of the surance paid by the employer.
burden costs (including social security tax, Medicare tax, Insurance ⫽ Liability Insurance ⫹ Workers’ Comp.
FUTA, SUTA, workers’ compensation insurance, general lia-
Insurance ⫽ $8.96 + $71.67 = $80.63
bility insurance, health insurance, and retirement) is dis-
cussed in Chapter 8. The changes are shown in Figure 3-6.
⫽
⫽ ⫽
FIGURE 3-6 Labor Charged to General Overhead
PAYING AN EMPLOYEE’S PAYING PAYROLL TAXES

WAGES When the employee’s costs were entered into the accounting
So far we have entered the employee’s time into the ac- system, a variety of state and federal taxes were set aside that
counting system, but the employee has yet to be paid. have not yet been paid. It is important to note that recording
When an employee is paid for the work he or she has per- an employee’s expense and paying that expense are two sepa-
formed, it affects the balance sheet. When an employee is rate transactions, which occur at different points in time,
paid, a company uses cash—an asset—to pay an accrued often separated by weeks. When the state and federal taxes are
liability. For a company that uses the chart of accounts in paid, it affects the balance sheet. When taxes are paid, a com-
Figure 2-1, the accrued liability is accrued payroll recorded pany uses cash—an asset—to pay an accrued liability. For a
in the 340 Accrued Payroll account. By reducing both an company that uses the chart of accounts in Figure 2-1, the ac-
asset account and a liability account by the same amount, crued liability is accrued taxes recorded in the 342 Accrued
the relationship between assets and liabilities on the bal- Taxes account. By reducing both an asset account and a liabil-
ance sheet is maintained. No changes occur on the income ity account by the same amount, the relationship between as-
statement or job cost ledger because the employee’s costs sets and liabilities on the balance sheet is maintained. No
have already been charged to the income statement and job changes occur on the income statement or job cost ledger be-
cost ledger. Paying an employee creates a negative cash cause the employee’s costs have already been charged to the
flow without a change in profit. income statement and job cost ledger. Paying payroll taxes
creates a negative cash flow without a change in profit.
Example 3-6: Determine the changes to the balance sheet
that occur when the employee in Example 3-4 is paid. Example 3-7: Determine the changes to the balance sheet
Solution: From Example 3-4, the employee is owed that occur when the federal taxes in Example 3-4 are paid.
$642.17. The contractor will use a check drawn against the Solution: From Example 3-4, the company owes $219.50 in
cash account to pay the employee. The changes are shown federal taxes on the employee’s wages. This includes funds
in Figure 3-7. withheld from the employee’s paycheck. The contractor uses
⫽
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FIGURE 3-7 Paying an Employee’s Wages

34 CHAPTER THREE
⫽
⫽ ⫽
FIGURE 3-8 Paying Payroll Taxes
a check drawn against the cash account to pay the federal ⫻ 4.3333 weeks per month). Each month the contractor will
government for the federal tax liability of all employees. In- use a check drawn against the cash account to pay the health
cluded in this amount is $219.50 for the weekly wages for insurance premium. The health insurance premium includes
the employee in Example 3-4. The changes resulting from the the health insurance premiums for all employees. Included in
single week of wages for the employee in Example 3-4 are this amount is $433.68 for the employee in Example 3-4. The
shown in Figure 3-8. changes resulting from paying the health insurance premium
for the employee in Example 3-4 are shown in Figure 3-9.
PAYING FOR BENEFITS

VACATION TIME FOR JOBSITE
When the employee’s time was entered into the accounting sys- EMPLOYEES
tem, funds were set aside to pay the health insurance premium
for the employee but the premium has yet to be paid. Again, we In Example 3-4, when the employee’s time was entered into
see that recording an employee’s expense and paying that ex- the accounting system, funds were set aside to pay for the em-
pense are two separate transactions, which occur at different ployee’s vacation time. This was done because it would be un-
points in time. When a company pays for a benefit, such as fair to charge all of an employee’s vacation to the job he or she
health insurance, it affects the balance sheet. When paying for was working on when his or her vacation was taken. For ex-
benefits, a company uses cash—an asset—to pay an accrued li- ample, if an employee worked on a job for one day, then took
ability. For a company that uses the chart of accounts in Figure a week’s vacation and returned to the job for one day, it would
2-1, the accrued liability is accrued insurance recorded in the distort the project costs to charge the job for seven days of
343 Accrued Insurance account. By reducing both an asset ac- work when only two days of work had been performed.
count and a liability account by the same amount, the relation- When a jobsite employee takes vacation, the employer
ship between assets and liabilities on the balance sheet is pays him or her for not working. The cost of this time is paid
maintained. No changes occur on the income statement or job from funds set aside and charged to the jobs the employee
cost ledger because these costs have already been charged to the worked on throughout the year. When an employee is paid for
income statement and job cost ledger. Paying for benefits cre- vacation time, it affects the balance sheet. No costs are incurred
ates a negative cash flow without a change in profit. because the company has been accruing these costs throughout
the year. As a result, no changes occur on the income statement
Example 3-8: Determine the changes to the balance sheet or job cost ledger. On the balance sheet the employee costs be-
that occur when the monthly health insurance premium for come an accrued liability, the same as they did when we looked
the employee in Example 3-4 is paid. The insurance is paid at Labor Charged to a Job or Labor Charged to General
every month (4.3333 weeks). Overhead. This increase in liability on the balance sheet is offset
Solution: From Example 3-4, the company owes $100.08 by an equivalent reduction in accrued liability in the form of
per week. The monthly premium is $433.68 ($100.08 per week accrued vacation. For a company using the chart of accounts in
⫽
⫽ ⫽
FIGURE 3-9 Paying for Benefits

⫽
⫽ ⫽
FIGURE 3-10 Vacation Time for Jobsite Employees
Figure 2-1, it would have an increase in liability recorded in the RECORDING OFFICE RENT
340 Accrued Payroll, 342 Accrued Taxes, and 343 Accrued
Insurance accounts, which would be offset by a reduction in li- When a construction company rents office space for the
ability in the 344 Accrued Vacation account. By increasing general office—space that cannot be charged to a job—it is
some liability accounts while decreasing another liability ac- handled differently than it would be if the company pur-
count by the same amount the relationship between assets and chased the office. When a bill for office rent is entered into
liabilities on the balance sheet is maintained. Neither a cash the accounting system, it affects the income statement and
flow nor a change in profit occurs because of this transaction. the balance sheet. On the income statement the rent is re-
corded as a general overhead expense. For a company that
Example 3-9: Determine the changes to the balance sheet uses the chart of accounts in Figure 2-1, the invoice would
when the employee in Example 3-4 is paid for one week’s be recorded to the 842 Office Rent account. This increase in
vacation time. general overhead cost decreases the profit on the income
Solution: The changes to the 340 Accrued Payroll, 342 statement by the amount of the invoice. On the balance
Accrued Taxes, and 343 Accrued Insurance accounts are sheet the invoice is recorded as an account payable-trade in
the same as they were in Example 3-4. Money to cover these the liability section. This increase in liability results in a re-
changes would be paid out of the 344 Accrued Vacation duction in the current period net income equal to the
account. Any money set aside from this week’s wages for amount of the general overhead invoice. As in the relation-
accruing vacation would come from the 344 Accrued Vaca- ships previously discussed, the reduction in profit on the in-
tion account and would be recorded in the same account come statement is equal to the reduction in the current
that was covering its costs, effectively washing itself out. period net income on the balance sheet. Recording office
In this example, there would be an increase in the 344 rent creates a change in profit but not a cash flow. Because
Accrued Vacation account of $38.00 to cover the vacation the cost is part of the general overhead and is not charged to
accrued during the week and a decrease from the same a job, the invoice does not affect the job cost ledger.
account of $1,141.12 to cover the employee’s costs for the
week. This creates a net decrease in the 344 Accrued Vaca- Example 3-10: Determine the changes to the balance sheet
tion account of $1,103.12 ($1,141.12 – $38.00). The changes and income statement of a $2,000 invoice for office rent.
are shown in Figure 3-10. Solution: The changes are shown in Figure 3-11.
⫽
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FIGURE 3-11 Recording Office Rent

36 CHAPTER THREE
⫽
⫽ ⫽
FIGURE 3-12 Recording Office Depreciation
Should the invoice cover more than one month’s rent, sheet by subtracting its balance from the balance of the total
the invoice may need to be treated as a prepaid expense. See fixed assets account; whereas, all other accounts on the asset
an accountant for help in determining how to handle this side of the balance sheet are used to record (increase) assets.
transaction. When the rent invoice is paid, it will have the This decrease in assets results in a reduction in the current pe-
same effect on the balance sheet as paying any other invoice, riod net income equal to the amount of the depreciation. As per
namely, reducing both accounts payable-trade while reduc- the relationships previously discussed, the reduction in profit
ing cash. Paying the invoice creates a negative cash flow on the income statement is equal to the reduction in the current
without a change in profit. period net income on the balance sheet. Recording deprecia-
tion creates a change in profit but not a cash flow. Because the
RECORDING OFFICE depreciation is part of the general overhead and is not charged
to a job, the depreciation does not affect the job cost ledger.
DEPRECIATION
Example 3-11: Determine the changes to the balance sheet
When the company owns the general office and cannot bill the
and income statement of $1,800 of office depreciation.
cost of the office to the job, the company needs to record the
loss in value or depreciation each month. When the loss in Solution: The changes are shown in Figure 3-12.
value is recorded, it affects the income statement and the bal-
ance sheet. On the income statement the depreciation is re-
corded as a general overhead expense. For a company that uses
RECORDING GENERAL
the chart of accounts in Figure 2-1, the depreciation would be OVERHEAD INVOICES
recorded to the 819 Depreciation account. This increase in gen- Recording general overhead invoices has the same effect on
eral overhead cost decreases the profit on the income statement the income statement and balance sheet as recording office
by the amount of the depreciation. On the balance sheet the rent, except that they are recorded to the appropriate general
depreciation is recorded in the less accumulated depreciation overhead category. Recording invoices results in a change in
contra account in the asset section, which is used to offset the profit, but not a cash flow.
value of the fixed assets. The depreciation recorded to the less
accumulated depreciation contra account is a credit, even Example 3-12: Determine the changes to the balance sheet
though it increases the accumulated depreciation contra ac- and income statement when a $500 telephone bill is recorded.
count, because contra accounts behave in the opposite manner Solution: The telephone bill is charged to the 846 Tele-
from other accounts. This is because the less depreciation ac- phone account in the general overhead section of the in-
count is used to reduce the assets on the asset side of the balance come statement. The changes are shown in Figure 3-13.
⫽
⫽ ⫽
FIGURE 3-13 Recording General Overhead Invoices

Exploring the Variety of Random
Documents with Different Content
It was not a horn that in the early morning sounded;
It was a maiden her ruddy braid lamenting:
“Last night they twined my braid together,
And interweaved my braid with pearls.
Luká Ivánovich—Heaven requite him!—
Has sent a pitiless svákha hither.
My braid has she begun to rend.
Tearing out the gold from my braid,
Shaking my pearls from my ruddy braids.”
—From W. R. S. Ralston’s The Songs of the Russian People.
MARRIAGE SONG
Her mother has counselled Máryushka,

Has given counsel to her dear Efímovna.
“Go not, my child,
Go not, my darling,
Into thy father’s garden for apples,
Nor catch the mottled butterflies,
Nor frighten the little birds,
Nor interrupt the clear-voiced nightingale.
For shouldst thou pluck the apples
The tree will wither away;
Or seize the mottled butterfly,
The butterfly will die.
And shouldst thou frighten a little bird,
That bird will fly away;
Or interrupt the clear-voiced nightingale,
The nightingale will be mute:
But catch, my child,
My dear one, catch
The falcon bright in the open field,
The green, the open field.”
Máryushka has caught,
Caught has the dear Efímovna,
The falcon bright in the open field,
The green, the open field.
She has perched him on her hand,
She has brought him to her mother.
“Mother mine, Gosudárynya,
I have caught the falcon bright.”
—From W. R. S. Ralston’s The Songs of the Russian People.
BEGGARS’ SONG
“Whither art Thou fleeing?” they spoke in tears to Christ. “For

whom art Thou leaving us? Who will without Thee give us to drink
and eat, will clothe us and protect us against dark night?”
“Weep not, poor people,” replied Christ: “Weep not, mendicants
and homeless and small orphans! I will leave you a golden mountain,
will give you a honeyed river, will give you vineyards, will give you
heavenly manna. Only know how to manage that golden mountain,
and to divide it among yourselves: and you will be fed and given
drink; you will be clothed and covered up in dark nights.”
Then John the Theologue retorted: “Hail to Thee, real Christ, King
of heaven! Permit me to tell Thee a few words, and take not ill my
words! Give them not a golden mountain, nor a honeyed river and
vineyards, give them not heavenly manna! They will not know how to
manage that mountain; it will be beyond their strength, and they will
not be able to divide up: they will not harvest the grapes, will not
taste the manna. Princes and noblemen, pastors, officials and
merchants will hear of that mountain, and they will take away from
them the golden mountain and honeyed river, the vineyards and
heavenly manna: they will divide up the golden mountain among
themselves according to their ranks, but the poor people will not be
admitted, and there will be much murder, and much spilling of blood.
The poor will have nothing to live on, nothing to wear, and nothing to
protect themselves with against dark night: the poor will die of
starvation, will freeze to death in cold winter. Give them rather Thy
holy name and Word of Christ; and the poor will go all over the earth,
will glorify Thee, and the orthodox will give them alms; the poor will
be fed and given drink, will be clothed and protected against cold
night.”
“Thank you, John the Theologue!” replied Christ the heavenly
King. “You have said a sensible word, and have discussed well,—
you have taken good care of the poor.”
AN ORPHAN’S WAILING
O mother dear that bare me, O with sadness longed-for one! To

whom hast thou left us, on whom are we orphans to rest our hopes?
From no quarter do warm breezes breathe on us, we hear no words
of kindness. Great folks turn away from us, our kinsfolk renounce us;
rust eats into our orphaned hearts. The red sun burns in the midst of
a hot summer, but us it keeps not: scarcely does it warm us, O green
mother-grave! Have a care for us, mother dear, give us a word of
kindness! No, thou hast hardened thy heart harder than stone, and
hast folded thy uncaressing hand over thy heart.
O white cygnet! For what journey hast thou prepared and
equipped thyself; from which side may we expect thee?
Arise, O ye wild winds, from all sides! Be borne, O winds, into the
Church of God! Sweep open the moist earth! Strike, O wild winds, on
the great bell! Will not its sounds and mine awaken words of
kindness?—From Ralston’s The Songs of the Russian People.
CONJURATION OF A MOTHER SEPARATED FROM HER CHILD
I, poor mother, weep in the high chamber of my house; from the

dawn I look afar over the fields, even until the sun goes to rest.
There I sit until night, till the damp dew falls; there I sit in grief, until,
weary of this torment, I resolve to conjure my cruel sorrow. I go into
the field; I have taken the nuptial cup, the taper of betrothal and the
handkerchief of marriage. I have drawn water from the mountain
spring, I have gone into the dark forest, and tracing around me a
magic circle, I have said aloud these words:—
“I conjure my dearest child by that nuptial cup, by that fresh water
and by that marriage handkerchief. With that water I lave his fair
face, with that handkerchief I wipe his honeyed lips, his sparkling
eyes, his rosy cheeks, his thoughtful brow; with that waxen taper I
light up his splendid garments, his sable bonnet, his belt of divers
colours, his embroidered boots, his chestnut locks, his noble figure
and manly limbs, that thou mayest be, my child, more brilliant than
the brightest sunbeams, sweeter to look upon than a sweet spring
day, fresher than water from the fountain, whiter than the wax,
stronger than the magic stone. Far be from thee the demon of
sorrow, the impetuous hurricane, the one-eyed spirit of the woods,
the domestic demon of strange houses, the spirit of the waters, the
sorcery of Kíev, the woman of the twinkling billows, the cursed
Babayagá, the winged and fiery serpent, the crow of evil omen. I put
myself between thee and the ogre, the false magician, the sorcerer,
the evil magic, the seeing blind and the old of double sight. By my
words of power, may thou be, my child, by night and by day, from
hour to moment, in the market-place, and asleep or in watching, safe
against the power of the evil spirits, against death, grief and
calamity; upon the water, against shipwreck; in fire, against burning.
“When thy last hour shall come, recall, my child, our tender love,
our bread and salt. Turn thyself towards thy glorious country, salute it
seven times—seven times with thy face to the earth, bid farewell to
thy family, throw thyself upon the damp ground and lull thyself to a
calm sleep.
“May my word be stronger than water, higher than the mountain,
weightier than gold, harder than rock, stronger than an armed
horseman, and if any dare to bewitch my child, may he be swallowed
by Mount Ararat, in bottomless precipices, in burning tar and
crackling fire; that sorceries and magic may for ever be powerless
against thee.”—From The Popular Songs of Russia, in Hogg’s
Instructor, 1855.
Fairy Tales.
For an account of the fairy tales see the chapter on
Folklore. The following works, of which Ralston’s is still the
best, give a large number of such stories: Russian Popular
Tales, from the German version of Anton Dietrich, London,
1857; W. R. S. Ralston, Russian Folk-Tales, London, 1873; J.
T. Naake, Slavonic Fairy Tales, London, 1874; E. M. S.
Hodgetts, Tales and Legends from the Land of the Tzar,
London, 1890; Jeremiah Curtin, Myths and Folk Tales of the
Russians, Western Slavs and Magyars, Boston, 1890; A.
Gerber, Great Russian Animal Tales (vol. vi, No. 2 of the
Publications of the Modern Language Association), Baltimore,
1891; R. Nisbet Bain, Russian Fairy Tales from the Skazki of
Polevoi, Chicago, 1895. There are also some articles in
periodicals: Household Tales of the Sclavonians and
Hungarians, and The Household Fictions of Esthonia and
Russia, in Dublin University Magazine, 1867 (vol. lxx);
Russian Popular Legends (by Ralston), in Fortnightly Review,
1869; Russian Songs and Folktales, in Quarterly Review,
1874 (vol. cxxxvi).
FROST
There was once an old man who had a wife and three daughters.
The wife had no love for the eldest of the three, who was a step-
daughter, but was always scolding her. Moreover, she used to make
her get up ever so early in the morning, and gave her all the work of
the house to do. Before daybreak the girl would feed the cattle and
give them to drink, fetch wood and water indoors, light the fire in the
stove, give the room a wash, mend the dress and set everything in
order. Even then her step-mother was never satisfied, but grumbled
away at Márfa, exclaiming:
“What a lazybones! What a slut! Why, here is a brush not in its
place, and there is something put wrong, and she has left the muck
inside the house!”
The girl held her peace, and wept; she tried in every way to
accommodate herself to her step-mother, and to be of service to her
step-sisters. But they, taking pattern by their mother, were always
insulting Márfa, quarrelling with her, and making her cry: that was
even a pleasure to them! As for them, they lay in bed late, washed
themselves in water got ready for them, dried themselves with a
clean towel and did not sit down to work till after dinner.
Well, our girls grew and grew, until they grew up and were old
enough to be married. The old man felt sorry for his eldest daughter,
whom he loved because she was industrious and obedient, never
was obstinate, always did as she was bid and never uttered a word
of contradiction. But he did not know how to help her in her trouble.
He was feeble, his wife was a scold and his daughters were as
obstinate as they were indolent.
Well, the old folks set to work to consider—the husband how he
could get his daughter settled, the wife how she could get rid of the
eldest one. One day she says to him:
“I say, old man! Let’s get Márfa married.”
“Gladly,” says he, slinking off (to the sleeping-place) above the
stove. But his wife called after him:
“Get up early to-morrow, old man, harness the mare to the sledge
and drive away with Márfa. And, Márfa, get your things together in a
basket, and put on a clean shift; you are going away to-morrow on a
visit.”
Poor Márfa was delighted to hear of such a piece of good luck as
being invited on a visit, and she slept comfortably all night. Early next
morning she got up, washed herself, prayed to God, got all her
things together, packed them away in proper order, dressed herself
(in her best things) and looked something like a lass! a bride fit for
any place whatsoever!
Now it was winter-time, and out of doors there was a rattling frost.
Early in the morning, between daybreak and sunrise, the old man
harnessed the mare to the sledge, and led it up to the steps, then he
went indoors, sat down in the window-sill, and said:
“Now then! I have got everything ready.”
“Sit down to table and swallow your victuals!” replied the old
woman.
The old man sat down to table, and made his daughter sit by his
side. On the table stood a pannier; he took out a loaf, and cut bread
for himself and his daughter. Meantime his wife served up a dish of
old cabbage soup and said:
“There, my pigeon, eat and be off; I have looked at you quite
enough! Drive Márfa to her bridegroom, old man. And look here, old
greybeard! drive straight along the road at first, and then turn off
from the road to the right, you know, into the forest—right up to the
big pine that stands on the hill, and there hand Márfa to Morózko
(Frost).”
The old man opened his eyes wide, also his mouth, and stopped
eating, and the girl began lamenting.
“Now then, what are you hanging your chaps and squealing
about?” said her step-mother. “Surely your bridegroom is a beauty,
and he is that rich! Why, just see what a lot of things belong to him:
the firs, the pine-tops and the birches, all in their robes of down—
ways and means anyone might envy; and he himself a bogatýr!”
The old man silently placed the things on the sledge, made his
daughter put on her warm pelisse and set off on the journey. After a
time, he reached the forest, turned off the road and drove across the
frozen snow. When he got into the depths of the forest, he stopped,
made his daughter get out, laid her basket under the tall pine and
said:
“Sit here, and await the bridegroom. And mind you receive him as
pleasantly as you can!”
Then he turned his horse round and drove off homewards.
The girl sat and shivered. The cold pierced her through. She would
fain have cried aloud, but she had not strength enough; only her
teeth chattered. Suddenly she heard a sound. Not far off, Frost was
cracking away on a fir. From fir to fir was he leaping and snapping
his fingers. Presently he appeared on that very pine under which the
maiden was sitting, and from above her head he cried:
“Art thou warm, maiden?”
“Warm, warm am I, dear father Frost,” she replied.
Frost began to descend lower, all the more cracking and snapping
his fingers. To the maiden said Frost:
“Art thou warm, maiden? Art thou warm, fair one?”
The girl could scarcely draw her breath, but still she replied:
“Warm am I, Frost dear; warm am I, father dear!”
Frost began cracking more than ever, and more loudly did he snap
his fingers, and to the maiden he said:
“Art thou warm, maiden? Art thou warm, pretty one? Art thou
warm, my darling?”
The girl was by this time numbed with cold, and she could scarcely
make herself heard as she replied:
“Oh! Quite warm, Frost dearest!”
Then Frost took pity on the girl, wrapped her up in furs and
warmed her with blankets.
Next morning the old woman said to her husband:
“Drive out, old greybeard, and wake the young people!”
The old man harnessed his horse and drove off. When he came to
where his daughter was, he found she was alive and had got a good
pelisse, a costly bridal veil and a pannier with rich gifts. He stowed
everything away on the sledge without saying a word, took a seat on
it with his daughter, and drove back. They reached home, and the
daughter fell at her step-mother’s feet. The old woman was
thunderstruck when she saw the girl alive, and the new pelisse and
the basket of linen.
“Ah, you wretch!” she cries, “But you sha’n’t trick me!”
Well, a little later the old woman says to her husband:
“Take my daughters, too, to their bridegroom. The presents he’s
made are nothing to what he’ll give them.”
Well, early next morning the old woman gave her girls their
breakfast, dressed them as befitted brides and sent them off on their
journey. In the same way as before the old man left the girls under
the pine.
There the girls sat, and kept laughing and saying:
“Whatever is mother thinking of? All of a sudden to marry both of
us off! As if there were no lads in our village, forsooth! Some
rubbishy fellow may come, and goodness knows who he may be!”
The girls were wrapped up in pelisses, but for all that they felt the
cold.
“I say, Praskóvya! The Frost’s skinning me alive. Well, if our
bridegroom doesn’t come quick, we shall be frozen to death here!”
“Don’t go talking nonsense, Máshka; as if suitors turned up in the
forenoon! Why, it’s hardly dinner-time yet!”
“But I say, Praskóvya! If only one comes, which of us will he take?”
“Not you, you stupid goose!”
“Then it will be you, I suppose!”
“Of course, it will be me!”
“You, indeed! There now, have done talking stuff and treating
people like fools!”
Meanwhile, Frost had numbed the girls’ hands, so our damsels
folded them under their dresses, and then went on quarrelling as
before.
“What, you fright! You sleepy face! You abominable shrew! Why,
you don’t know so much as how to begin weaving; and as to going
on with it, you haven’t an idea!”
“Aha, boaster! And what is it you know? Why, nothing at all except
to go out merrymaking and lick your lips there. We’ll soon see which
he’ll take first!”
While the girls went on scolding like that, they began to freeze in
downright earnest. Suddenly they both cried out at once:
“Whyever is he so long coming? You know, you have turned quite
blue!”
Now, a good way off, Frost had begun cracking, snapping his
fingers and leaping from fir to fir. To the girls it sounded as if
someone were coming.
“Listen, Praskóvya! He’s coming at last, with bells, too!”
“Get along with you! I won’t listen; my skin is pealing with cold.”
“And yet you’re still expecting to get married!”
Then they began blowing their fingers.
Nearer and nearer came Frost. At length he appeared on the pine,
above the heads of the girls, and said to them:
“Are ye warm, maidens? Are ye warm, pretty ones? Are ye warm,
my darlings?”
“Oh, Frost, it’s awfully cold! We are utterly perished! We’re
expecting a bridegroom, but the confounded fellow has
disappeared.”
Frost slid lower down the tree, cracked away more, snapped his
fingers oftener than before.
“Are ye warm, maidens? Are ye warm, pretty ones?”
“Get along with you! Are you blind, that you can’t see our hands
and feet are quite dead?”
Still lower descended Frost, still more put forth his might and said:
“Are ye warm, maidens?”
“Into the bottomless pit with you! Out of my sight, accursed one!”
cried the girls—and became lifeless forms.
Next morning the old woman said to her husband:
“Old man, go and get the sledge harnessed; put an armful of hay
in it, and take some sheepskin wraps. I dare say the girls are half
dead with cold. There is a terrible frost outside! And, mind you, old
greybeard, do it quickly!”
Before the old man could manage to get a bite, he was out of
doors and on his way. When he came to where his daughters were,
he found them dead. So he lifted the girls on the sledge, wrapped a
blanket round them and covered them up with a bark mat. The old
woman saw him from afar, ran out to meet him and called out ever
so loud:
“Where are my girls?”
“In the sledge.”
The old woman lifted the mat, undid the blanket and found the girls
both dead.
Then, like a thunder-storm, she broke out against her husband,
abusing him and saying:
“What have you done, you old wretch? You have destroyed my
daughters, the children of my own flesh, my never-to-be-gazed-on
seedlings, my beautiful berries! I will thrash you with the tongs; I will
give it you with the stove-rake.”
“That’s enough, you old goose! You flattered yourself you were
going to get riches, but your daughters were too stiff-necked. How
was I to blame? It was you yourself would have it.”
The old woman was in a rage at first, and used bad language; but
afterwards she made it up with her step-daughter, and they all lived
together peaceably, and thrived, and bore no malice. A neighbour
made an offer of marriage, the wedding was celebrated and Márfa is
now living happily. The old man frightens his grandchildren with
(stories about) Frost, and does not let them have their own way.—
From W. R. S. Ralston’s Russian Folk-Tales.
THE CAT, THE GOAT AND THE RAM

Once upon a time there lived in a yard a Goat and a Ram, and
they lived in great friendship with each other: say there was but a
bunch of hay—even that they divided in two equal halves. If there
was anyone to be punched in his sides, it was only Tom-Cat Váska;
he was such a thief and robber,—always on the lookout for prey, and
let there be anything not under lock, his stomach immediately
growled for it.
The Goat and the Ram were once lying quietly and having a
friendly chat, when who should turn up but grey-browed, Purring
Váska, and he was whining pitifully. So the Goat and Ram asked
him:
“Kitty-Cat, grey-browed Cat, why are you whining so, and why do
you hop about on three legs?”
“How can I help crying? The old woman has beaten me; she
struck me hard, almost pulled my ears out, nearly broke my legs,
and came very near choking my life out of me.”
“What have you been guilty of, to deserve such a fate?”
“All the trouble was, I was hungry, and lapped up the cream.” And
the Purring Cat once more began to whine.
“Kitty-Cat, grey-browed Cat! What are you whining about?”
“How can I help crying? As the old woman was beating me, she
kept on saying: ‘Where shall I get the cream when my son-in-law will
come to-morrow? I’ll have to butcher the Goat and the Ram!’”
The Goat and the Ram howled loud: “O you grey Cat, senseless
head! Why have you ruined us? We’ll butt you to death!”
Then Purring Váska humbly confessed his guilt and begged
forgiveness. They forgave him, and the three held a council of how
matters stood and what was to be done.
“Well, middle brother Ram,” asked Purring Cat, “have you a tough
head? Just try it against the gate!”
The Ram took a run and hit the gate with his head: the gate shook,
but did not open. Then rose the elder brother Billy-Goat, took a run,
hit the gate and it flew open.
The dust rose in a cloud, the grass bent to the ground, while the
Goat and Ram were running, and the grey-browed Cat was hopping
after them on three legs. He grew tired, and he begged his plighted
brothers: “Elder brother and middle brother! Don’t abandon your
younger brother a prey to the wild beasts!”
So the Goat stopped and took him on his back, and again they
raced over hills, and vales, and drifting sands. And they came to a
steep hill and a standstill. Under that steep hill was a mowed
meadow, and on that meadow there was a whole town of haystacks.
The Goat, and Ram, and Cat stopped to take a rest; it was a cold
autumn night. Where were they to get some fire? The Goat and the
Ram were still thinking about it, when the Purring Cat got some twigs
with which he tied the Goat’s horns, and he told the Goat and the
Ram to strike each other’s heads. They hit each other with such a
might that sparks flew from their eyes: the twigs crackled.
“That’ll do,” said the grey Cat. “Now we will warm ourselves.” No
sooner said than he put a haystack on fire.
They had not yet gotten warm, when lo! there was an uncalled
guest, a Peasant-in-gabardine, Mikháylo Ivánovich. “Let me,” he
said, “warm myself and take a rest; I don’t feel well.”
“You are welcome, Peasant-in-gabardine, Ant-eater! Good fellow,
where do you come from?”
“I went to the beehives and had a fight with the peasants; so I am
sick now, and I am on my way to the Fox to get cured.”
They passed the dark night together: the Bear under a haystack,
Purring Váska on the haystack, and the Goat and the Ram by the
fire.
“Ugh, ugh!” said the White Wolf, “it is not Russian flesh I smell.
What manner of people may they be? I must find out!”
The Goat and the Ram bleated with fright, and Purring Váska held
such discourse: “Listen, White Wolf, Prince of all the wolves! Don’t
anger our eldest one, for if he should get at you, it will be your end.
Don’t you see his beard? that’s where his strength lies. With his
beard he strikes down the animals, but with his horns he only flays
them. You had better ask him with due respect to let you have your
fun with your younger brother that is lying under the haystack.”
So the wolves bowed to the Goat, and surrounded Míshka, and
began to tease him. He got up, waxed angry and just grabbed a wolf
with each paw; they howled their “Lazarus,” but somehow managed
to get away with drooping tails, and they raced as fast as their feet
would carry them.
In the meanwhile the Goat and the Ram seized the Cat, and ran
into the woods, where they once more met some grey wolves. The
Cat crawled up to the top of a pine-tree, and the Goat and the Ram
got hold of a branch of the pine-tree with their fore legs, and hung
down from it. The wolves stood under the tree, grinned and howled,
watching the Goat and the Ram. The grey-browed Cat saw that
things were very bad, so he began to throw down pine cones upon
the wolves, and kept saying: “One wolf! Two wolves! Three wolves!
Just a wolf apiece. It is not so long ago I, Purring Váska, ate up two
wolves with all their bones, so I am not hungry yet; but you, big
brother, have been out a-hunting bears, and you did not get any, so
you may have my share!”
Just as he said that, the Goat could not hold on any longer, and
dropped with his horns straight down on a wolf. But Purring Váska
yelled out: “Hold him, catch him!” The wolves were so frightened that
they started on a run, and did not dare look back. That was the last
of them.
THE FOX AND THE PEASANT
Once upon an evening the Fox, feeling grieved, took a walk to

divert herself and breathe the fresh air. Though she had not
expected it, there presented itself an opportunity to have her
revenge, for whom should she see but Vúkol in his cart! As she
scented some fish, she decided to steal them. The question now was
how to steal them out of Vúkol’s cart. Of course, it was too risky to
crawl in, for Vúkol would lay on his whip, or, catching her by her tail,
would kill her altogether. So Lísa Patrikyéevna softly ran all around
the Peasant, who was hastening home, lay down on the ground and
barely breathed. The rogue lay there as if she really were dead: her
mouth open, her teeth grinning, her snout turned upwards, her nose
flabby; she neither moved, nor heaved, nor wagged her tail.
Vúkol was travelling at a slow pace, when suddenly his nag
neighed. “What’s the matter?” spoke Vúkol, rose and looked down
the road. “Oh, I see! God has sent me a nice gift. I’ll pick it up; it will
be a fine thing for my wife, for its fur is as soft as a shawl.” Having
very wisely discussed thus, Vúkol took the Fox by the tail and put her
on the fish, and went over the bridge. But Lísa Patrikyéevna was
very happy and, to carry out the first part of her program, quietly
devoured a good-sized tench; then she started dropping one fish
after another on the road, until she had emptied the whole cart. Then
she stealthily dropped down from the cart herself and started on a
run without turning back, so that the dust flew up.
It grew dark, and murky night was near; Vúkol Sílych pulled his
reins, and the horse raced faster. He reached his house, without
discovering the theft, and, smiling to his wife, he said with a merry
voice to her: “Woman, just look into the cart and see what I have
brought you! I found it in the road, near the bridge, by the pines and
birches.”
His wife Dárya rummaged in the hay, tossed it to and fro, hoping to
find her present. “Where is it? What a shame!” She turned everything
upside down, shook the fish bag, but she only got her hands dirty,—
the present she did not find. Put out about such a deception, she
said to her husband, Vúkol: “What a stupid you are!”
In the meantime Patrikyéevna carried all the fish to her lair, and
she had an easy time of it all autumn, and even winter. But this
revenge is insignificant: her greater revenge is still ahead. Things are
bad for you, Vúkol Sílych! Be prepared for the worst.
Proverbs.
The first collection of Russian proverbs was made by the
poet Bogdanóvich, at Catherine’s command. The most
extensive collection of the present time is the one by Dal. In
the English language there are but two small accounts of
these proverbs: one, in R. Pinkerton’s Russia; or,
Miscellaneous Observations on the Past and Present of the
Country and its Inhabitants, London, 1833, and Russian
Proverbs, in Quarterly Review, vol. cxxxix.
The heart has ears.
Home is a full cup.
A maiden’s heart is a dark forest.
Calumny is like a coal: if it does not burn it will soil.
Good luck disappears like our curls; bad luck lasts like our nails.
Sorrow kills not, but it blights.
The pine stands afar, but whispers to its own forest.
Blame not my bast shoes, my boots are in the sledge.
The poor man has a sheepskin coat, but a human soul too.
Behind the orphan God Himself bears a purse.
Poverty is not a sin, but twice as bad.
Seven nurses cost the child an eye.
May God make me fleshy: rosiness I can get for myself.
A dog is wiser than a woman: it does not bark at its master.
Seven axes will lie together, but two spindles asunder.
Let a woman into Paradise, she’ll be for bringing her cow with her.
The Holy Russian land is large, but everywhere the dear sun
shines.
Our stove is our own mother.
Not corners but pies make a room fair.
Even bad kvas is better than water.
By that which wounded may your wound be cured.
Black may be toil, but white is its price.
God waits long, but hits hard.
Terrible are dreams, but God is merciful.
God is high, and the Tsar far off.
Pray to God, but row to shore.
The wolf catches the destined sheep.
Be born neither wise nor fair, but lucky.
Moustaches for honour, but even a goat has a beard.
An old crow croaks not for nothing.
Love your wife like your soul, and beat her like your fur coat.
Not long hurt the bumps from a loved one’s thumps.
A wife is not a guitar; when your playing is done, you can’t hang
her up on the wall.
It’s a bore to go alone, even to get drowned.
A parent’s blessing can neither be drowned in water nor
consumed in fire.
A visible girl is of copper, but an invisible one of silver.
Hold out, Cossack; thou wilt become Hetman.
He who sweats afield, and prays to God at home, will never
starve.
Boldness drinks mead and chafes fetters.
A bad peace is better than a good quarrel.
If the thunder rolls not, the muzhík will not cross himself.
Don’t beat the muzhík with a cudgel, but beat him with a rouble.
To rotten wares the seller is blind.
A snipe is small, but, for all that, a bird.
Fear not the threats of the rich but the tears of the poor.
Drink at table, not behind a pillar.
Who can withstand God and Nóvgorod the Great?
Where there is an oath, there is also a crime.
God’s will and the Tsar’s decree.
The Tsar’s wrath is the messenger of death.
God loves the just, but judges love the pettifogger.
I bailed him out: he taught me a lesson.
The knout is not the devil, but it will seek out the truth.
Wide is the gateway leading into a boyár’s court, but narrow—out
of it.
Slavery drinks mead, and freedom water.
—From Quarterly Review, vol. cxxxix.
THE EIGHTEENTH CENTURY
Iván Tikhónovich Pososhkóv. (1670-1726.)
An interesting figure that belongs both to the old and the
new régime is Pososhkóv. He was the son of a peasant and
had received no other education than what he could pick up
from the reading of church books. He also acquired a
knowledge of arithmetic, a rare science for the men of the
older generation, and of grammar, and much practical
experience in his wanderings through Russia. Being a good
business man and a close observer of current events, he
became very rich, owned several factories, and carried on
commerce on a large scale. He had brought from his peasant
home the religious piety of the old order of things, but at the
same time was shrewd enough to see the advantages of
reform, which he favoured to the best of his ability. His son
was among the first Russians who were sent abroad to be
instructed. He provided him with ample means and a written
Father’s Testament to his Son, with a Moral, in Confirmation
of Holy Writ. This Testament belongs in the same category as
the Domostróy (see p. 126), but the spirit of reform has
softened many of the ancient crudities. Of his other works the
most interesting is his The Book on Poverty and Wealth, That
is, An Exposition of what Causes Dire Poverty and
Abundantly Increases Wealth, which is characteristic of the
transitional stage of Russia. In this work, Pososhkóv
combines shrewd guesses on economic problems with crude
conceptions of their solution.
“THE BOOK ON POVERTY AND WEALTH”
FROM THE CHAPTER “ON MERCHANTS”
The merchant guild must not be disregarded, for without

merchants no country, neither large nor small, can exist. The
merchant is the companion of the military: the soldier fights, and the

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Library of Congress Cataloging-in-Publication Data

ISBN 10: 0-13-267505-6

PART I Equipment Costs 19

CHAPTER 1 Construction Financial The Job Cost Ledger 21

Why Is Construction Financial Management

Recording Changes in Billings in Excess of Costs Degree of Fixed Asset Newness 86

Types of Costs 122 Nondeductible Expenses/Costs 180

Lines of Credits 236 Rate of Return 260

In this section we introduce you to construction financial man-

CHAPTER 1: Construction Financial Management

The Surety Information Office—an office that collects WHY IS CONSTRUCTION

Conclusion projects. This book is designed to help the reader develop

In this section we look at how to account for the company’s

CHAPTER 2: Construction Accounting Systems

CHAPTER 3: Accounting Transactions

CHAPTER 4: More Construction Accounting

CHAPTER 6: Analysis of Financial Statements

110 Cash 730 Repairs and Maintenance

FIGURE 2-1 Chart of Accounts

FIXED AND OTHER ASSETS

FIGURE 2-2 Balance Sheet for Big W Construction

Table 2-1 Loader Costs

calculated using the cash method and the percentage-of- Historical

FIGURE 2-5 Breakdown of the Job Cost Ledger

Code Description Code Description

04000 MASONRY 14000 CONVEYING SYSTEMS

05000 METALS 20000 FIRE SUPPRESSION

06000 WOOD, PLASTICS, & COMP. 23000 HVAC

FIGURE 2-6 Sample Cost Codes for a Commercial Contractor

Code Description Code Description

FIGURE 2-7 Sample Cost Codes for a Residential Contractor

FIGURE 2-9 Breakdown of the Equipment Ledger

Conclusion statements. Additionally, these companies are required to

A C C O U N T I NG T RAN SAC T ION S

FIGURE 3-2 Invoice Charged to a Job without Retention

INVOICE CHARGED TO A JOB INVOICE CHARGED TO A

FIGURE 3-3 Invoice Charged to a Job with Retention

FIGURE 3-4 Paying Invoices

FIGURE 3-5 Labor Charged to a Job

FIGURE 3-6 Labor Charged to General Overhead

PAYING AN EMPLOYEE’S PAYING PAYROLL TAXES

FIGURE 3-7 Paying an Employee’s Wages

FIGURE 3-8 Paying Payroll Taxes

PAYING FOR BENEFITS

FIGURE 3-9 Paying for Benefits

FIGURE 3-10 Vacation Time for Jobsite Employees

FIGURE 3-11 Recording Office Rent

FIGURE 3-12 Recording Office Depreciation