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Cash Accounting
What is Cash Accounting?
Cash accounting is a financial accounting method often used within the construction industry. It is characterized by recognizing revenue and expenses only when cash is received or paid out. This means that transactions are only recorded when the business physically sees the money. For instance, if a construction company performs a job in June but doesn't receive payment until July, the income will be registered in July's financial statements, not in June's. This method works well for smaller construction businesses as it allows them to track cash flow accurately and in real-time. Furthermore, cash accounting in construction provides a straightforward representation of how much actual cash the business has at any given moment, allowing for better financial management and planning.
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Other construction terms
What is Overhead Allocation?
Overhead Allocation in the construction industry refers to the process of distributing indirect costs or overheads related to a project, amongst the various direct cost items within the project. This process allows all associated project costs to be accurately reflected, providing a holistic understanding of a project's total expenses. Overhead costs could include equipment rents, electricity, insurance costs, etc. The allocation can be based on certain criteria like the rate of resource consumption. It's a fundamental aspect of financial management, allowing the accurate pricing of projects, assisting in budgeting, and providing key insights that can guide decision-making.
What is a General Ledger (G/L)?
A General Ledger (G/L) in the construction industry is a fundamental financial tool for recording all financial transactions of a construction company including assets, liabilities, equity, revenue, and expenses. It not only reflects every financial transaction related to a construction project, but also contains crucial details such as date, description, and transaction amount. Essentially, the G/L acts as the core of a construction company's financial record system where all transaction data from sub-ledgers or modules, such as accounts payable, accounts receivable, and cash management, are consolidated. It provides a comprehensive financial picture necessary for reporting and strategic decision-making in the construction business. By regularly maintaining and auditing the G/L, construction companies can ensure financial accuracy and compliance, as well as evaluate their financial performance and stability.
What is Cost Plus Billing?
Cost Plus Billing in the construction industry refers to a method where the customer agrees to cover the actual costs, expenses and other direct costs of the construction project plus an additional sum for contractor’s overhead and profit. These typically include costs of materials, labor, and subcontractor charges. The agreement clearly establishes and defines what is constituted as cost, the overhead percentage, and the profit percentage, reducing the risk of any surprise costs. Essentially, the 'Cost' represents the direct costs of the construction, while the 'Plus' is the contractor's fee and is usually agreed upon as a fixed percentage of the total costs or as a target price with a shared savings clause.
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