How to best show costs

Knowing how to best show costs is central to proper and accurate accounting and budgeting for your small business or corporation. Normally, accounting has to do with matching your revenue from the sale of a product or a service with all of the costs that are associated with producing that product or service and then delivering that product or service within a particular time period. This matching of revenue and cost is rather straightforward for some industries, while for other industries they are more complicated. We will use the construction business as an example for understanding different ways to best show costs when you are coming up with a budget and accounting for costs and revenue.

There are four different ways to track costs and to match revenue, costs, and profit, particularly when you are in the construction business: cash, accrual, completed contract, and percentage of completion.

Cash method of showing costs

When you use the cash method of showing costs and matching your revenue, your costs, and your profits, what you are doing is noting and recognizing your income only when you receive cash. Then expenses are noted and marked when cash is given out, or disbursed. The cash method of showing costs and tracking revenue is advantageous for cash reasons. However, the cash method of showing costs is not the best way to go when it comes to reporting your costs and managing your budget. Why? Because you won't be entering any of the costs until you receive cash or you give out cash. You probably aren't paying your bills immediately when you receive them, and your customers probably are not doing so either, so only keeping track of revenue and costs when you receive costs is not a particularly timely way of going about showing costs and tracking revenue so that you can ensure that you are making a profit and not over-spending the revenue that you are receiving.

The accrual method of showing costs

Let's say that you run a small construction company. When you are working out how to show costs for time spent, for materials used, or for cost-plus contracts, then you will want to look carefully into using the accrual method. When you use the accrual method for showing costs, you will recognize and note your income whenever you prepare an invoice for any services or products rendered. Then when you receive an invoice, you will record any expenses and costs. This is a much more timely way of accounting and budgeting than the cash method. However, it is not particularly accurate if you are a custom builder, so you will want to look into other methods to accompany the accrual method of showing costs and tracking revenue.

The completed contract method of tracking costs

When you use the completed contract method, if your small businesses uses contracts when negotiating the delivery of products and services, you will not record any revenue or any expenses until the contract is complete. In terms of taxes, you will be able to defer paying any taxes on your profits until you finish the job or complete your services. You will consider any costs incurred during construction as assets. Any customer payments are tracked as liabilities.

The percentage-of-completion method of tracking costs

When you use the percentage-of-completion method, you will be working with your contracts and noting gross profit, cost, and revenue throughout your contract based on periodic measures of progress. In order to use this particular method of tracking costs, you must come up with an accurate estimation of your contract, and that your job cost system will be easy to compare to your estimate.

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