Whether you specialize in carpentry, masonry, drywall, electricity or plumbing, one of the things you have in common with other construction contractors is that one of your most important skills is multi-tasking. Because the nature of construction work in Canada tends to be seasonal and because you don’t know when or where the next contract is coming from, you have to take on as many projects as possible at any given time.

This job juggling also means having to juggle time, budgets and resources. In all that juggling, it’s hard to keep track of whether or not you’re making any profit on any given project. It’s also hard to know if your business is making or losing money overall. And as any contractor who’s bid on contracts that required bonding or financing will tell you, your books need to be bulletproof. Also, because one of the last things you want is a CRA audit hitting you with a massive bill, taking you to court or putting you out of business, keeping track of your books is as crucial to your business as your skill with a saw or a power drill.

So whether you’re in charge of the accounting for your construction company or are an independent contractor, knowing the basics of accounting for construction work is important, even if you hire an accountant or use accounting software. This post, as the title says, is just the basics, a quick explanation of each of the four accounting methods used by construction companies.

The Cash Method

As the name suggests, the method of accounting records both income and expenses only when cash changes hands. As Financeit’s  Accounting for contractors: A financial survival guide for construction businesses article puts it “The downside for contractors is that it can be the least accurate in terms of providing an overall view of the financial health of your business.”

This is because if you take a deposit, for example, you’re recording income you haven’t earned yet or you may be paying for expenses before you’ve collected money that you have earned. Not having an accurate picture of your finances won’t help you make the necessary changes on a particular project or to your business practices in general.

The Accrual Method

In the accrual method of accounting, income is recorded as soon as an invoice is sent and expenses are recorded as soon as an invoice is received. If you use the accrual method, the Government of Canada requires you to:

• “report income in the fiscal period you earn it, no matter when you receive it
• deduct expenses in the fiscal period you incur them, whether or not you pay them in that period”

As you can imagine, this method will also not give you a good gauge of your finances until all outgoing and incoming invoices are paid.

The Completed Contract Method

Using the completed contract method of accounting, income and expenses are not officially entered in the Profit & Loss portion of your balance sheet until the contract is completed. Some tax professionals may recommend this method for shorter-term contracts to allow you to defer your taxes, but it may not be the right choice for your company if you’re trying to arrange financing.

The Percentage of Completion Method

In the percentage of completion model, revenues and expenses are recorded on an on-going basis as the work is completed. This method requires more bookkeeping, but it gives you the most accurate picture of where you stand financially and is recommended if you are juggling jobs and/or if your company is growing and looking to take on bigger contracts.