Quote: A CPA wants to know how to calculate profit and loss

[Ballscientist]

Quote from a CPA
I have a new client, my first-ever spec homebuilder. I've fixed up/cleaned up the company file. I've done all the steps (recorded all construction loans to a closing [dummy] account, created a sales receipt for the sale of the spec home, transferred the development costs [other asset account] to COGS - Homes, etc.) that QuickBooks help recommends. However,I still can't make heads or tails of the last part, where you close out the deal and "pay off" the construction loans. I don't truly understand where the profit or loss comes from in this series of transactions. My guy needs this done right away. I would appreciate so much any help I could get. I'd be happy to mail a check to anyone who could review this with me over the telephone. I've seen some great posts on here; I hope I'm lucky enough to get one or two that will get me over the top on this project. Thanks, gang.

My thought:
Sale price - interest on loan - broker's commission - RE Tax - transfer tax - service fees -

[Joe Btfsplk]

Construction accounting

I'm not familiar with construction accounting, but I believe there are different ways of doing it. One method I believe places everything in construcion in progress or some such account, then moves it to cost of sales when the construction is finished. A series of transactions would occur:
Loans would be a debit to cash and credit to Loans Payable.
Construction in Progress would be a debit to Construction in Progress and a credit to Accounts payable. Later you would debit accts payable and credit cash.

When you make a sale you would debit Accounts Receivable or Mortgage Receivable
and credit Sales. You would also debit Cost of Sales and credit Construction in Progress.

All other expenses would be charged to the appropriate expense account when incurred and would be credited to either Cash or Accounts payable.

I don't know how Quickbooks would do it, but the basic steps would be something like the above--although there may be variations based on your accounting procedure.

If the seller carried the mortgage, then he would have to keep up with that.

[Black Bart]

Go back down the page a few posts to

"How to record it in the Quickbook." OldJack and geekgirldany have some good remarks on it.

[Snaggletoof]

BallScientist

I guess my first response is to ask "Who is this guy? ..and how did he pass the CPA exam?" While I admit it is not Accounting 101, it is not far from Accounting 201. And certainly not nearly as difficult a question as those he had to answer to pass the exam. In fact, I wish our friend Sova would read this post and comment. Other CPAs are probably agog after reading your question as well.

To give you some semblance of an answer, the IRS (and GAAP under most circumstances) requires that the accounting be reported on the "percentage of completion" method. There are other methods such as the "completed contract method" or the "cash" method, but in most circumstances these are inferior measurements and easy for the taxpayer to manipulate.

Profit is added to the job in the same proportion to Total Profit as the job costs bear to the Total Projected job costs. This is true whether the contractor bills the customer or not. To make this easier, an illustration may help:

1) Contract was bid at $220,000, including $200,000 in expected costs and $20,000 in profit.
2) At the end of the year, contractor has spent $120,000, or 60% of the expected cost.
3) Revenue to be reported is 60% of the $220,000, or $132,000. Doesn't matter whether the customer has been billed $132,000 or not.
4) Assume customer has been billed only $75,000 and the bookkeeper has recognized the $75,000. Contractor must recognize revenue of an additional $57,000 at the end of year, and thus is paying taxes on $57,000 he doesn't really have.

Percentage-of-completion is a BIG taxation problem for contractors, but it is the law of the land. The same methodology above would be applicable for GAAP purposes, except under unusual circumstances.

[Joe Btfsplk]

I guess my first response is to ask "Who is this guy? ..and how did he pass the CPA exam?" While I admit it is not Accounting 101, it is not far from Accounting 201. And certainly not nearly as difficult a question as those he had to answer to pass the exam. In fact, I wish our friend Sova would read this post and comment. Other CPAs are probably agog after reading your question as well.
.

Passing the CPA test is no guarantee that you would know anything about construction accounting. However, a CPA should know basic accounting and should be able to obtain a book on construction accounting and follow it. I doubt if a question posted here would give you sufficient information.

One thing about the CPA test: you have to study a lot of things you will probably forget soon after passing the test because much of what you learn will not be used in your practice. I had to bone up on a lot of cost accounting, but have never done any cost accounting-type work.

I didn't have to know anything about oil and gas accounting for the CPA test, but my work required me to learn all kinds of things most accountants never heard of like converting information from a chromatograph analysis to determine gallons per MCF, BTU per cubic foot, reading schematics of gathering systems, knowing the difference between a 'wet' BTU and a 'dry' BTU etc, etc.

[OldJack]

It appears the original poster is quoting someone else that is a CPA. I doubt that and would guess this is a joke slamming CPA's. Its not likely that any CPA is that dumb.

[Black Bart]

Basic Books

It appears the original poster is quoting someone else that is a CPA. I doubt that and would guess this is a joke slamming CPA's. Its not likely that any CPA is that dumb.

I'm not a CPA, but I guess we all had the same thought as Snag -- the question seemed elementary and very low-level indeed.

Still, I don't think it's a joke or a slam against you guys. He's posted before (7-22-06) and asked the question "Where was the word "Controller" born?" Here's more of his post:

"I am a scientist. I am starting to enjoy chatting accounting and finance. My friend's job title is Controller. What does it mean?"

It goes on a couple of more paragraphs, but I think maybe he's asking the question for his non-CPA buddy.

[Bees Knees]

People often use the term "CPA" to describe anyone in the accounting profession, even bookkeepers who hold no license to practice as CPAs. I agree with Black Bart. The guy is probably not a CPA.

[Joe Btfsplk]

People often use the term "CPA" to describe anyone in the accounting profession, even bookkeepers who hold no license to practice as CPAs. I agree with Black Bart. The guy is probably not a CPA.

CPA is also used in other businesses: it stands for CLEANING, PRESSING AND ALTERATIONS.

[OldJack]

CPA is also used in other businesses: it stands for CLEANING, PRESSING AND ALTERATIONS.

That is absurd. Everyone knows it stands for "Car Parking Attendant".

[Bees Knees]

In my house, it stands for "Cat Puke Afoot"...




...especially in the middle of the night, in the middle of the floor leading to the bathroom...

[Zee]

Share the knowledge not the arrogance

Lighten up a little. I've been a practicing CPA 30 years. Each time I read this board I learn something new. It's humbling to see how much more knowledge many of the posters seem to have. Why not just share the knowledge without trashing the poster?

[OldJack]

Passing the CPA test is no guarantee that you would know anything about construction accounting.

True, but in most states, if not all, a CPA that has passed the exam can't practice until (s)he has worked for a couple of years as an employee of a CPA firm that then qualifies the candidate for a valid state license to practice before the public. In other words a CPA can't sign as such until (s)he has the license. In 2± years the person should have had some experience with real accounting methods. I have signed for new CPA's to get their license and I sure would not for one as dumb as the post implied. That is why I don't believe the original post was a valid representation or statement by an actual practicing CPA.

[veritas]

I think I ticked him off with one of my comments about the scientific method.

[Joe Btfsplk]

True, but in most states, if not all, a CPA that has passed the exam can't practice until (s)he has worked for a couple of years as an employee of a CPA firm CPA.

Not in all states.

When I took the CPA test you had to have worked under the supervision of a CPA. My boss's boss was a CPA when I worked for the State and that qualified me to become a CPA after I passed the test. I only worked for a CPA firm a few months long before I took the CPA test.
While I worked for an Oil and Gas company I had a 'summer intern' that worked under my supervision between his junior and senior year of college. That qualifed as part of his experience requirement.

Neither my experience with the State or the experience of the 'summer intern' had any significant relevancy to practicing public accounting--although both had a value in making you think like an accountant when dealing with facts and figures.