Accounting Practices in Construction & Infrastructure Industry (Part-2)

CMA Ramesh Krishnan , Last updated: 29 August 2011
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Introduction: In Continuation of my first part, we will discuss about accounting practices in the Construction & Infrastructure Industry.

I. Accounting practices in the Industry:

In these accounting practices article part 2, I want to discuss from starting stage which is from budgeting to preparation of financial statements stage, because of most of construction & Infrastructure work are engaged on project basis as I discussed in part 1. So before entering in to accounting part, we need to understand the budgeting & costing part also.

1. Preparation of Budget for the project: Construction & Infrastructure works mostly have been carried out by project basis. Once the company got the work, we need to start prepare the budget for the particular work based on the estimation quoted. In the budget preparation we need to analyze the each and every thing which is direct & indirect cost involve in the project and what are the other overheads may be incurred while doing the work. Also all the expenses need to be segregated as variable, semi variable and fixed costs, because this will help us to derive the contribution for the particular project. Projected related capital cost also will be budgeted methodically. We need to prepare separate project profitability report to monitor the project. Budget will help to monitor the expenses & revenue for the particular project.

2. Commercial checking of documents: As like Manufacturing industry, infrastructure also having commercial team for checking the bills, the work of commercial team is to check the purchase order and work order which issued for the project and scrutiny the vendor bills along with orders. Also control the cost of project with the given budget and get approvals for excess and continuous monitor the project cost. Also study the customer billing terms and schedules, verify the invoices along with the contract agreement and billing terms, schedules with the customer and approve before submit the invoices to the customer. This process will help to control your revenue leakages in billing and other related terms with customer.

3. Project accounting system: In this industry accounting system is project accounting system. Project accounting system means the maintaining separate books of accounts for each project separately. This is very much required to control the project in proper manner. Even some of the companies not maintaining the separate books, they are maintaining the profit & cost center concepts. I listed here below the process of both accounting methods:

Separate books for Each project	Combined books for all projects
Create separate set of books for each project like cash book, Bank book, All other vouchers entries	1. Not create separate set of books. Maintaining the combined books for all project along with the head office books
Direct and other project related expenses have been captured in the separate books of accounts	2. All project related expenses direct & indirect captured through the cost & profit center created in the head office books
Here only the overheads incurred in the head office or corporate office related to project is captured through cost centers and transfer to the particular projects. Asset purchases are also entered in project books only	3. Here all are including fixed assets purchase and overheads captured in the corporate books through cost & profit center.
Revenues are also accounted in Project books only	4. Revenue accounted in combined books through profit center.
Transaction between inter projects & head office have been entered through branch accounting system	5. No branch accounting system involved since combined books
Profit & loss account, Balance sheet can be viewed separately in the books	6. In combined books through cost center and profit center, some companies those using ERP software can be viewed directly
Need to prepare the consolidated financial statements, may be through software or other modes	7. Since combined books the consolidated financials can be taken books itself.
Expenses and other details can be controlled through expenses budgets	8. Expenses can be controlled by Expenses budget along with cost center budget.

Even both accounting system appears differ, but final result will be the same. But in both system of accounting, one separate accounts person will be in charges in site, that person will be coordinate with the accounts team with corporate or head office.

Also for combined books keeping system should have strong method of capturing the revenue & expenses and internal check system, like methodical cost center numbers or names. While accounting each and every voucher need to be checked properly and account correct project details.

Both system of accounting having their own advantages & Limitations, but the object wise both are having same line of result. Also accounting policies and techniques are same in both system of accounting like recognition of revenue and expenses, method of depreciation, valuation of assets are within the accounting standards and based on the accounting policies of companies.

Conclusion: These accounting practices part -2, I discussed the project accounting system in the industry. In further part I would like to discuss the Taxation practices and other specific requirement in the industry which an Accounts person should know in this industry.

Thank you.

CMA.Ramesh Krishnan