Builder's Guide to Accounting 01

Question 1

1. What are the two accepted ways to record income?

Answer 1

1. Percentage of Completion

2. Completed Contract Method

Question 2

2. For most businesses, income is recognized when:

Answer 2

work is performed, and RECORDED when statements are mailed.

Question 3

3. However, builders sometimes receive payment for work not yet completed, or only partially completed. The portion of income above the degree of completion is:

Answer 3

UNEARNED INCOME. It is not EARNED and should not be recorded as INCOME until THE WORK IS FINISHED.

Question 4

4. When you receive CASH for work that is only partially complete, you have to:

Answer 4

separate out the unearned part and assign it to a special account.
This is known as PERCENTAGE OF COMPLETION ACCOUNTING.

Question 5

5. If you receive a 6k payment (1/2 the total contract price), but the project is only 40% complete, the entry is:

Answer 5

Cash……………6k
Earned Inc………4800
Unearned Inc……1200

Question 6

6. Accountants handle the “UNEARNED INCOME” situation by:

Answer 6

“DEFERRING” the unearned income.

Question 7

7. However, if the project is 40% complete but you’ve been paid less than 40%, the difference has to:

Answer 7

be ACCRUED.
This way you recognize income before you receive payment, or even send out a bill, because it is money that has TRULY BEEN EARNED.

Question 8

8. On a 12k contract that is 40% complete, the entry is:

Answer 8

Earned Inc (40%)…4800
Cash……………….4320
Accrued Income……480

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Question 9

9. The PERCENTAGE OF COMPLETION METHOD is used by:

Answer 9

most contractors, and it is the only acceptable method for builders who have large jobs in progress at the end of the tax year.

Question 10

10. In ALL cases of payment above or below the ESTIMATED PERCENTAGE OF COMPLETION, you:

Answer 10

ACCRUE the DEFICIT
and
DEFER the EXCESS INCOME

Question 11

11. What is the advantage of the PERCENTAGE OF COMPLETION method?

Answer 11

that INCOME, EXPENSES, and PROFITS are recognized and reported as the job progresses, so the financial statements give a fairly accurate picture of your financial position, including expected profits and losses.

Question 12

12. What is the disadvantage of the PERCENTAGE OF COMPLETION method?

Answer 12

That all INCOME, EXPENSES, and PROFITS are only ESTIMATES until the job is complete.