Construction accounting involves unique journal entries due to the nature of the industry, including long-term contracts, percentage of completion, and job costing. Below are some common construction accounting journal entries:
1. Recording Costs Incurred on a Construction Project
Example 1: Direct Material Purchase for a Project
Scenario: On January 10, 2024, a construction company purchases $50,000 worth of materials for a specific construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-10-2024 | Construction in Progress (CIP) | 50,000 | |
| 01-10-2024 | To Accounts Payable | 50,000 |
Explanation:
- Construction in Progress (CIP) will debited to reflect the cost of materials used in the ongoing project.
- Accounts Payable will credited to reflect the liability to the supplier.
2. Recording Labor Costs
Example 2: Payroll for Construction Labor
Scenario: On January 31, 2024, the company incurs $30,000 in direct labor costs for workers on a specific construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-31-2024 | Construction in Progress (CIP) | 30,000 | |
| 01-31-2024 | To Wages Payable | 30,000 |
Explanation:
- Construction in Progress (CIP) will debited to allocate labor costs to the specific project.
- Wages Payable will credited to reflect the liability for wages owed.
3. Allocating Overhead Costs to Projects
Example 3: Allocating Overhead to a Project
Scenario: On February 15, 2024, the company allocates $10,000 of overhead costs (such as equipment depreciation, administrative salaries) to a construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 02-15-2024 | Construction in Progress (CIP) | 10,000 | |
| 02-15-2024 | To Overhead Allocation | 10,000 |
Explanation:
- Construction in Progress (CIP) will debited to assign the overhead costs to the project.
- Overhead Allocation will credited to reflect the allocation of these costs.
4. Billing the Client (Progress Billing)
Example 4: Progress Billing to Client
Scenario: On March 1, 2024, the company bills the client $100,000 for work completed to date on a construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-01-2024 | Accounts Receivable | 100,000 | |
| 03-01-2024 | To Billings on CIP | 100,000 |
Explanation:
- Accounts Receivable will debited to reflect the amount billed to the client.
- Billings on Construction in Progress (CIP) will credited to record the billing on the project.
5. Recognizing Revenue Based on Percentage of Completion
Example 5: Revenue Recognition (Percentage of Completion Method)
Scenario: On March 31, 2024, the company recognizes revenue based on the percentage of completion for a construction project. The project is 50% complete, with total expected costs of $200,000 and total contract revenue of $400,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-31-2024 | Cost of Construction | 100,000 | |
| 03-31-2024 | Construction in Progress (CIP) | 100,000 | |
| 03-31-2024 | Billings on CIP | 200,000 | |
| 03-31-2024 | To Construction Revenue | 200,000 |
Explanation:
- Cost of Construction will debited to recognize the cost associated with the portion of the project completed.
- Construction in Progress (CIP) will credited to reduce the CIP account.
- Billings on CIP will debited to reverse the previous billing entry.
- Construction Revenue will credited to recognize the revenue earned.
6. Recording Retainage
Retainage is a portion of the contract amount that is withheld until the project is satisfactorily completed.
Example 6: Recording Retainage Receivable
Scenario: On April 1, 2024, the company records retainage of $10,000 for a completed portion of the project that will be paid by the client upon project completion.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-01-2024 | Retainage Receivable | 10,000 | |
| 04-01-2024 | To Accounts Receivable | 10,000 |
Explanation:
- Retainage Receivable will debited to reflect the amount withheld by the client.
- Accounts Receivable will credited to reduce the amount receivable from the client.
7. Closing Out a Completed Project
Example 7: Transferring Costs on Project Completion
Scenario: On April 30, 2024, the company completes a construction project, and the total costs of $250,000 are transferred from the CIP account to the Cost of Goods Sold (COGS).
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 04-30-2024 | Cost of Goods Sold (COGS) | 250,000 | |
| 04-30-2024 | To Construction in Progress (CIP) | 250,000 |
Explanation:
- Cost of Goods Sold (COGS) will debited to recognize the cost of the project.
- Construction in Progress (CIP) will credited to remove the costs from the CIP account.
8. Recording Project Completion and Client Payment
Example 8: Final Payment from Client
Scenario: On May 15, 2024, the company receives the final payment of $150,000 from the client, including retainage.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 05-15-2024 | Bank | 150,000 | |
| 05-15-2024 | To Retainage Receivable | 10,000 | |
| 05-15-2024 | To Accounts Receivable | 140,000 |
Explanation:
- Bank will debited to reflect the receipt of the final payment.
- Retainage Receivable will credited to clear the retained amount.
- Accounts Receivable will credited to clear the remaining balance due.
These examples cover some of the key transactions in construction accounting, ensuring accurate tracking of project costs, revenues, and profitability.