Construction Accounting
Handling Customer Deposits (CD) and Work In Process (WIP) in your accounting system to maximize cash flow and protect profits.
- The steps in the graphic below demonstrate the accounting flow for a project which has three milestone deposits required by the contract.
- A milestone may be defined in the contract as a time period (Monthly), a Phase (Contract, Framing and Rough Trades, Drywall, etc.), or any other period you wish. When you set milestones, remember that you are not the Lender on the project. Collect sufficient funds at each milestone deposit to cover all Direct Expenses, Overhead and Profit to get to the NEXT milestone.
- Milestone 1 – Site Prep, Earthwork and Foundation Deposit = $100,000;
- Milestone 2 – Framing, Exterior Finish, Rough Trades Deposit = $200,000;
- Milestone 3 – Interior Finish, Trades Finish, Completion Deposit = $300,000.
- The process outlined below shows the accounting for each of three milestone cycles.
The Accounting Flow using Customer Deposits and Work In Process:
Repeat the process:
- Customer makes Deposit ► DR Checking and CR Customer Deposits;
- Work is done on the Project ► DR Work In Process and CR Accounts Payable
- Pay the Accounts Payable ► DR Accounts Payable and CR Checking
- Complete Milestone ► DR Customer Deposits and CR Project Income
- Match Milestone Expenses to Milestone Income ► DR Project Cost to Build and CR Work In Process