Decoding the Chart of Accounts for Construction Businesses

Every business functions uniquely, and this reflects in its chart of accounts. This chart is composed of four primary segments: assets, liabilities, equity, and income & expenses.

Account Numbering:

Every account in the chart is assigned a unique name and ID number, often spanning five or more digits. For example, a starting digit of "1" indicates an asset, while "4" or "5" points to operational expenses or COGS. Leaving gaps in numbering allows room for future additions.

Understanding the Chart:

• Assets: They're typically categorized into current and long-term. Liquid assets like cash come first, followed by Accounts Receivable, Inventory, and then short-term prepaid assets. Long-term assets cover investments like land or equipment and their accumulated depreciation.

• Liabilities and Equity: Here, liabilities are divided into current (like Accounts Payable) and long-term (like mortgages). Equity pertains to company stocks and retained earnings. Special categories for Home Services businesses can include deferred revenue and warranty reserves.

• Income: Firms often have a primary "Job Income" or "Revenue" account. But it’s also important to track other incomes, like maintenance agreements and warranties, and deductions such as discounts or customer damages.

• Expenses: These break into Direct and Indirect expenses. COGS, crucial for trades, fall under Direct and influence pricing. This category includes costs like equipment purchase and labor. Indirect expenses cover broader operational costs.

In setting up expense accounts, customization is key. For example, a plumber might have accounts for heavy machinery, while a restoration contractor might include drying equipment.

In essence, the chart of accounts is a dynamic tool, and tailoring it to a business's needs is vital for clarity and growth.