Published June 7, 2024 . 8 mins read

Balance Sheet Basics for Construction Industry Professionals

Assets = Liabilities + Owner’s Equity

Navigating the intricacies of a balance sheet is a small feat, especially for professionals in a construction company who may need a strong accounting background. However, the ability to decipher this financial document is of paramount importance for individuals involved in the construction industry. It is one of the three main financial statements businesses must create: the balance sheet, income statement, and cash flow statement. The balance sheet is also home to many critical KPIs that give insight into the financial health of your business.

For those whose expertise lies in building projects rather than crunching numbers, understanding the balance sheet is a gateway to informed decision-making. This article has been crafted with you in mind, bridging the gap between construction know-how and financial acumen.

What’s Included on the Balance Sheet

A balance sheet comprises three primary types of accounts from the general ledger: assets, liabilities, and equity. Assets and liabilities are divided into two categories: current and long-term. “Current” refers to assets or liabilities that can be converted into cash or settled within 90 days. “Long-term” assets and liabilities require more than 90 days to be converted into cash or paid.

Current Assets

Assets represent everything a company owns or controls with present or future economic value. In the construction industry, assets are crucial as they help contractors deliver on projects.

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 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.


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.

These current assets provide insight into a construction company’s short-term financial health and ability to fund ongoing operations and projects.

Fixed Assets

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.


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.

Current Liabilities

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.

In essence, current liabilities are obligations the company must settle typically within a year. Monitoring these liabilities is essential for construction companies to manage their short-term financial health and ensure they have adequate resources to meet their immediate obligations.

Long-Term Liabilities


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.

Long-term liabilities offer insights into a company’s longer-term financial obligations and its strategy for funding significant assets or projects. Understanding these liabilities in the construction industry context can help stakeholders gauge the company’s future financial health and ability to take on larger, extended projects.


Equity represents the ownership interest in the company, indicating the residual value after all liabilities are deducted from assets. For construction companies, equity provides insights into the company’s financial health, stability, and the confidence of its investors. Let’s break down the mentioned sections.

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.

In summary, equity provides a snapshot of the company’s net value and the distribution of its earnings. Analyzing the equity section can help stakeholders understand the financial stability of the construction company and its strategy for growth and rewarding shareholders.

What Makes the Balance Sheet Different for Construction Businesses?

In construction accounting, the balance sheet is uniquely influenced by several key factors. Work-in-progress (WIP) reports are essential, detailing the costs and revenues of ongoing projects. The percentage of completion method is commonly used, recognizing revenue and costs as projects advance, impacting the balance sheet with project-specific assets and liabilities. Revenue recognition is complex due to over and underbillings, which adjust accounts receivable and liabilities. Retainage, where payments are withheld until project completion, affects the balance sheet by altering receivables and liabilities.

Additionally, bonding, sureties, and insurance further influence the balance sheet, with adjustments for premiums, obligations, and liabilities. Job costing and change orders are crucial, adjusting accounts payable, receivable, and costs, reflecting project scope and cost changes on the balance sheet.

Balance Sheet Preparation and Review

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.

Within ProNovos you can analyze over 20 critical financial KPIs and filter through your companies previous performance by month, quarter and year

Wrapping Up: Effective Analysis of the Balance Sheet

For construction businesses, effective analysis of the balance sheet is crucial for financial health and project success. Regularly updating and monitoring key performance indicators (KPIs) that can be found using the Balance Sheet such as the Cash Conversion Cycle, Fixed Asset Ratio, and Days Sales Outstanding, helps maintain financial stability. Periodic reviews—monthly, quarterly, or annually—enable benchmarking against past performance, providing insights for continuous improvement.

This checklist outlines critical KPIs that construction executives should track to enhance their understanding of and management of financial metrics. Tools like the ProNovos Financial Intelligence Cloud can streamline reporting and analysis, making it easier to maintain an accurate and meaningful balance sheet. These practices ensure your construction business remains financially sound and well-positioned for growth.

Schedule a time to meet with a Solutions Advisor to learn more.