Chart of accounts for a construction company

ahmedmn3

Hi,

I am creating chart of accounts for a construction company which buys lands, make building then sell them as apartments, I have the below transactions and questions about them which simplify our scenarios. Could you provide me with answers?

1- Owner decided to invest 3 Million $ in his construction company. To record this this transaction, he debits the cash in bank account by $3,000000 and credits his equity account by the same amount.

2- The owner bought a land, it costs 1 million$. To record this, he credited the cash in bank account by $1,000000 and debited the cost account that designed to record lands. Can we make this cost account COGS?

3- He paid $1,00000 to complete the first stage of the construction process which is digging, paving and fencing. To record this, he debited the asset account called "Land Improvements" by $1,00000 and what account should he credit it by the same amount?

4- He paid $5,0000 to construct the lower level (which is going to be apartment 1). To record this, what accounts should he credit it and debit it?

5- He paid $5,0000 to construct the ground level (which is going to be apartment 2 and 3). To record this, what accounts should he credit it and debit it?

6- He received a customer request to buy apartment 1, the price of the apartment is $3,00000, the customer will pay with checks due on 5/5/2017. To record this, he debited account receivable by $3,00000 and what accounts should he credit it by the same amount?

Regards

Mohamed

burg

1 - ok
2 - yes
3 - no more COGS and credit bank
4 - Dr COGS and Cr Bank
5 - as 4
6 - Sales

~It is a construction company so the building of the property is not an asset it is part of the trade. All construction costs are costs of sale. The sales are then sales. Other than this there will be labour costs and general running costs such as stationery, phone, travel, insurance, etc.

Bertie

May need a retention account going forward.

ahmedmn3

Thanks a lot for your answers. @burg about point 3 the first stage of the construction process which is is digging, paving and fencing. I got an answer also telling to record this as an asset named land improvement and The process during the construction is called capitalization. also, The apartment complex should be recorded as "Building" or separate apartments, at the cost to build. Do you have any idea about the capitalization?

@Bertie what do you mean by retention account?

Regards

burg

@ahmedmn3 The treatment you explain would work for a normal building that was one from which the business operated. This however is not an asset. The land was purchased as part of the trade and therefore is a cost of the business.

Bertie

Retention - when a company takes on a contract to build a complex, for example, there will be, or usually there will be an element of the value held back by the purchaser until a point in the future.

This is to cover, but not exclusively so, a period after finishing the build, to cover instances of the roof blowing off, or the contract taking longer than it should to complete.

There are many reasons and caveats behind retention. But at this stage it is good for you to be made aware of retention within the construction industry.

Bertie

Did he buy the land for the company as an investment?

Does he plan to build his office on this land?

The trouble with this is that there are many questions, and each, if answered incorrectly through inefficient information provided will definitely prove costly.

Is the company holding this land as an investment for capital appreciation? The problem here is proving to HMRC that the land is an investment and not stock when the land is disposed of.

If I bought land tomorrow I'd be able to more than reasonably argue to HMRC it is to be held as an investment. For a construction company to do such will be difficult- it's got stock written all over it.

Do you work for the company? Are you the accountant? Is there an accountant if you are not?

ahmedmn3

About the land he bought it to make a building and sell it as apartments, he did not buy it to make his office.

I started a new business with my brother, works in construction industry, I am not an accountant but we have one. Just need to build a chart of accounts and use it in quickbooks ASAP. Do you have an accounting book on how to manage construction business?

burg

ahmedmn3 said:

About the land he bought it to make a building and sell it as apartments, he did not buy it to make his office.

I started a new business with my brother, works in construction industry, I am not an accountant but we have one. Just need to build a chart of accounts and use it in quickbooks ASAP. Do you have an accounting book on how to manage construction business?

In all seriousness this is not the simplest way to start. My suggestion is book an appointment with some local accountants and explain what is going on. It is not worth getting it wrong as the costs for doing so could be huge.