Accounting is essential for all businesses, ensuring financial health and compliance.
But did you know that not all accounting is the same?
While most businesses use what’s known as ‘traditional accounting’, the construction industry operates under a specialised system called ‘construction accounting’.
Why the difference?
Because building projects aren’t like selling clothes in a shop.
This blog will clearly explain the key differences between construction accounting and traditional accounting, helping you understand why construction businesses need their own unique financial approach.
Key Differences Between Construction Accounting And Traditional Accounting
To really highlight the differences, here’s a quick comparison table:
| Feature | Construction Accounting | Traditional Accounting |
|---|---|---|
| Business Focus | Project-based | Business-wide operations |
| Income Counting | Complex, stage-based (e.g., ASC 606) | Simpler, point-of-sale or service completion |
| Cost of Goods Sold (COGS) | Detailed, project-related, broad | Straightforward, product-related, narrower |
| Overhead Costs | Some project overheads in COGS | Overheads generally separate from COGS |
| Profit Check | Project-level | Business-level |
| Work Locations | Multiple project sites | Fixed business location(s) |
| Contract Length | Long-term | Short-term |
Understanding Traditional Accounting
Traditional accounting is what most businesses use every day. Think of your local shop, a restaurant, or a regular service business – they likely use traditional accounting methods. It’s designed for businesses that sell products or services from a fixed location and have a more predictable way of working.
Here are the main things to know about traditional accounting:
- Business-Wide Focus: Traditional accounting looks at the overall financial health of the entire business. It’s about the big picture, not so much about individual projects.
- Simpler Income Counting: Income (revenue) is usually counted when a sale is made or a service is done. It’s pretty straightforward – sell a dress, count the income.
- Straightforward Cost of Goods Sold (COGS): COGS is usually just the cost of buying or making the products you sell. For a clothing shop, it’s the cost of buying the clothes.
- Overhead Costs are Separate: Costs like office rent, marketing, and general admin are kept separate as ‘overhead expenses’. They are not usually mixed in with the cost of the products you sell.
- Easy Profit Check: It’s generally easier to see which products or services are making money and which are not. You can often spot trends and make quick decisions based on overall business reports.
- Fixed Location Work: Traditional accounting fits businesses that operate mainly from one or a few fixed locations, where things are quite predictable day-to-day.
- Short-Term Transactions: Most transactions are short-term – you sell something, you get paid relatively quickly.
In short, traditional accounting is like having a financial check-up for your whole business, using methods that are simple and work well for everyday businesses with predictable operations.
Understanding Construction Accounting
Construction accounting is a specialised system made just for the construction industry. Building projects are unique, often complex, and can take a long time. Construction accounting is designed to handle these challenges, focusing on individual projects rather than just the overall business.
Here’s what sets construction accounting apart:
- Project-Based Focus: Everything is tracked by individual project. Each building job is like its own mini-business, with its own income and expenses carefully monitored.
- Complex Income Counting: Counting income (revenue) is not simple. Because projects can take years, income is often recognised as work progresses, following rules like ASC 606. It’s not just about waiting until the whole building is finished to count the income.
- Detailed Cost of Goods Sold (COGS): COGS is very detailed and includes all costs linked to a specific project. This includes direct costs like materials and worker pay, but also indirect costs like fuel for machinery on-site or temporary site offices.
- Project-Related Overheads in COGS: Some costs that would be ‘overhead’ in other businesses are included in the COGS of a construction project if they directly relate to that project. This makes COGS broader in construction accounting.
- Profitability by Project: Profit is usually checked project by project. Because each project is unique, you need to see if each one is making money on its own. This requires careful tracking of all income and costs for every project.
- Work at Different Sites: Construction work happens at different locations for each project. Equipment and workers move around, so accounting needs to track costs wherever work is happening.
- Long-Term Contracts: Construction contracts can last for years, and payments can be spread out over time. Accounting needs to manage income and expenses over these long periods.
Essentially, construction accounting is like having a detailed financial toolkit for managing complex, long-term building projects, making sure each project is profitable and financially controlled.
Get Expert Help With Construction Accounting Today!
If you’re in the construction industry, traditional accounting may not be enough to cover your specific needs. At KPG Taxation, we offer expert construction accounting services that help you manage your projects, cash flow, and taxes effectively.
Our tax accountants are dedicated to ensuring you get the maximum refund possible, with tailored advice and solutions designed to save you time and money. Ready to take your business to the next level? Contact us now for a consultation and experience the difference.
