This Podcast Is Episode Number 0240 And It Will Be About Construction Accounting Secrets For New Contractors Construction Accounting Basics For Construction Contractors Construction Accounting is not a natural mindset for Construction Contractors. Construction Accounting has own language. Regular Accounting the language is Income Minus Expenses Equals Net Profit. Construction Accounting is Income Minus Cost of Goods Minus Overhead Equals Net Profit. That simple little thing called Cost of Goods Sold is the primary difference between Regular Accounting and Construction Accounting. Understanding that difference and how it relates to Job Costing and Job Profitability can get contractors like you firmly on the road to financial freedom. Then comes Construction Accounting. Income is added up to have Total Income. Cost of Goods Sold included more than the cost of material. Total Income less Total of Cost of Goods Sold equals Gross Profit.   Expenses include a variety of overhead related items. Gross Profit less Total Expenses equals Net Ordinary Income.   Net Ordinary Income Plus Other Income and Less Other Expenses equals Net Income. Financial Reports have a lot of information on them. Your tax accountant will calculate the depreciation. When a contractor purchases a small tool, and it is an expense. What determines whether a tool is an asset or expense is the cost of the tool (not its size of the tool or piece of equipment) Any tool or equipment that costs less than Five Hundred Dollars is considered an expense. The Internal Revenue Service expects that it will last less than one year and not repairable or the cost of purchasing a new tool will be less than the cost to repair it most of the time it is not feasible to repair. These days it is hard to find anyone who can do repairs on small tools. The neighborhood hardware store is usually a True Value Hardware or Ace Hardware. I can only think of a few larger Hardware Store that might send the tool out for repairs. Smaller communities may have repairs as a common option.        As a contractor you may purchase a tiny tool (in size) but huge in price meaning it cost over Five Hundred Dollars.  These type of tools need to be depreciated. Congress approves an accelerated depreciation (Section 179) where most items can be depreciated at a 100% in a single year. This benefits small contractors as the annual threshold is usually higher than they spend on tools and equipment. Each of these larger tools needs to be listed in the Accounting Software (we use QuickBooks Desktop In the Cloud) and we can setup QuickBooks for Contractors in a way that makes it fast and easy for the day to day contractor bookkeeping to get done. Why – Because the Tax Accountant decides on what can group and which tools and equipment need to be itemized individually. The rules differ depending on the item on how much can be depreciated on a single line and which items may have internal caps.   Short Answer - In other words, How many lines and How many pages does it take to get to 100%. If taking all of the depreciation available does not make sense to take it a single year the Tax Accountant may decide to use traditional depreciation rules. Using the thought that if taking 100% of the available depreciation doesn’t help you – don’t waste the depreciation deduction. Spread it out over several years. What is Cost of Goods Sold In Construction Accounting? Contractors often ask us can they buy our Chart of Accounts with Cost of Goods Sold and import them into their QuickBooks Desktop file or their QuickBooks Online file. The answer is yes! Click Here for QuickBooks Desktop Chart of Accounts With Cost of Goods Sold Click Here for QuickBooks Online Chart of Accounts With Cost of Goods Sold Direct Costs are tied to the jobs (field labor, material, and other cost items) Office material (pencils, paper, toner, etc. are overhead) Yes, an...