Published June 7, 2024 . 8 mins read

Cash and Securities

This category captures the company’s most liquid assets, including physical currency, funds in bank accounts, and short-term investments such as treasury bills and marketable securities that can be readily converted to cash.

Accounts Receivable

These represent amounts owed to the company by its clients for work that has been invoiced but has yet to be paid.

Inventory

Inventory can span raw materials bought for projects, costs related to ongoing projects (work in progress), and completed projects awaiting sale or delivery to clients.

Earnings in Excess of Billings

This refers to situations where the company has recognized revenue for work done but has yet to invoice the client, indicating that the earned revenue from a project surpasses the billed amount.

Retainage

This category reflects a portion of the contract price withheld until the work is fully completed to the client’s satisfaction.

Prepaid Expenses

Denote expenses the company has paid in advance for goods or services it will receive later. Common examples in construction include insurance premiums for future coverage periods and upfront payments to suppliers for goods or services to be provided later.

Other Current Assets

This is a catch-all category for other short-term assets not specifically listed. It might include items like refundable deposits made to secure business arrangements, amounts expected to be returned from tax authorities, or short-term loans provided to employees.

Property and Plant

This account includes the value of land and buildings owned by the company, such as offices, warehouses, and production facilities. These assets are used in business operations and are depreciated over their useful lives, except for land, which is not depreciated.

Equipment

Covers the cost of machinery, vehicles, and other equipment used in construction projects. This includes items like cranes, excavators, trucks, and other heavy machinery. These assets are depreciated over their expected useful life.

Accumulated Depreciation

This contra-asset account represents the total depreciation expense recorded for all fixed assets over time. It reduces the book value of fixed assets on the balance sheet, reflecting the wear and tear or obsolescence of these assets.

Other Fixed Assets

These include other long-term tangible assets that do not fit the above categories. This may encompass furniture, fixtures, leasehold improvements, and other items that support the company’s operations. These assets are also depreciated over their useful lives.

Notes Payable

This category refers to written promises made by the company to pay specified amounts, either on demand or at a determined future date. They typically involve short-term borrowings, often for financing immediate needs or operations.

Accounts Payable

One of the most common forms of short-term debt, accounts payable represent amounts the company owes to suppliers or vendors for goods and services received but still need to be paid. This could be for raw materials, subcontracted services, or other project-related costs in the construction industry.

AP Retainage

In the construction sector, it’s customary for a percentage of the total payable amount to be withheld until the completion or certain milestones of a project, ensuring the quality and timeliness of work. AP Retainage refers to the amount the company owes but is withheld until specific contractual conditions are met.

Billings in Excess of Earnings

This occurs when the amount billed to a client exceeds the earnings recognized from the work completed. Essentially, it indicates that a company has invoiced a client for more than the value of the work done to date. This liability represents an obligation to either complete the remaining work or adjust the billing.

Tax Payables

These are amounts owed to governmental bodies, representing taxes due based on the company’s operations. This could include income taxes, sales taxes, payroll taxes, or other industry-specific taxes.

Other Current Liabilities

A catch-all category for any other short-term obligations not explicitly listed above. Examples might include accrued wages, interest payable, or short-term loans from banks or other institutions.

Mortgages

Mortgages represent loans taken out by the company, typically for the purchase of real estate properties, buildings, or land. These loans are secured against the value of the property. Ownership of properties can be crucial for business operations, warehouses, or project developments in the construction industry. Mortgages have repayment terms that extend beyond one year, making them a long-term liability.

Equipment/ Vehicle Financing

Construction companies often need specialized equipment and vehicles but might not always have the upfront capital to purchase them outright. Equipment or vehicle financing allows companies to acquire these essential assets and pay for them over a period of time. These are essentially loans where the equipment or vehicle acts as collateral. Just like mortgages, these are considered long-term liabilities, given the extended repayment terms.

Other Long-Term Liabilities

This category encompasses other obligations that don’t fit neatly into the aforementioned categories but are due beyond a one-year timeframe. They might include bonds payable, deferred tax liabilities, or long-term lease obligations. It’s a placeholder for various financial commitments that the construction company has agreed to settle in the more distant future.

Retained Earnings

This is one of the most critical components of equity. Retained earnings represent the cumulative net income that the company has earned over its existence but has not distributed to its shareholders. Instead of distributing these earnings, the company reinvests them into its operations for expansion, acquisition of new equipment, or funding new projects. A positive retained earnings value indicates profitability over time, while a negative value might suggest accumulated losses.

Shareholder Distribution (or Dividends)

This refers to the portion of the company’s profits that is distributed to its shareholders. Not all profits are distributed in many instances, especially when companies need to retain capital for growth or debt repayment. However, regular dividends can signify a company’s good financial health and ability to generate consistent profits. In the construction industry, where projects can be capital-intensive, and profits might vary depending on the project cycle, the dividend distribution strategy can be a significant indicator for investors.

Common Stock

Common stock represents the ownership shares in the company. When a company issues common stock, it’s raising capital by selling ownership stakes. Each share of common stock represents a fractional ownership in the company. The value of common stock on the balance sheet is typically recorded at par value, with any amount received above this value recorded as “additional paid-in capital.” For construction companies, issuing common stock can be a way to fund large projects or expansions without incurring debt.

Internal Preparation

Internal preparation involves gathering and recording all financial transactions, updating work-in-progress (WIP) schedules, and ensuring accurate job costing. This process includes reconciling bank accounts, verifying receivables and payables, and updating depreciation schedules for fixed assets. Necessary adjusting entries for accruals, deferrals, and retainage are made, followed by compiling an initial balance sheet and preparing a trial balance to check for discrepancies.

CPA Review

In the CPA review stage, a certified public accountant is engaged to verify the accuracy of the internally prepared balance sheet. The CPA reviews financial data and supporting documents, making any necessary adjustments and corrections. The process concludes with the CPA providing a review report summarizing findings and recommendations, which can be used by the internal team and given to sureties for higher assurance.

CPA Audit

The CPA audit involves an external CPA firm thoroughly examining the balance sheet. This includes understanding the audit scope, preparing required documents, and conducting fieldwork to test internal controls and verify transactions. Auditors provide interim reports and suggest adjustments, culminating in a final audit report. Post-audit activities include reviewing the audit findings, addressing issues, and implementing improvements to enhance financial reporting and compliance.