Bookkeeping for roofers can be more than just recording revenue and expenses when they occur. In some cases, you need to embrace more advanced accounting techniques. In particular, you may need to recognize revenue over time when you take on a long-term roofing contract.
This principle is commonly used by contractors on significant projects. Here's what you need to know.
When to recognize revenue over time
You should recognize revenue over time when projects are going to take a significant amount of time, and you are going to receive payments or send out bills as you work on the project.
In some cases, this can happen in installments. For instance, this applies if you are hired to put the roofs on all the homes in a housing development and you get paid after each roof.
When conditions must be met for recognizing revenue over time
To recognize revenue over time, two conditions need to be met.
1) You need to be able to reasonably estimate your progress. With the above example, you can measure progress as each roof is completed.
If you were putting a roof on a large commercial building, you may be able to measure completion based on the square footage you've completed compared to the total job. This is called the percentage of completion method.
2) Your client needs to pay you as you complete the work. If your client pays you all at once when you're finished, you are using the completed contract method of accounting. In this case, you recognize all the revenue when you receive it instead of overtime.
How to recognize revenue over time
There are a few different ways to measure revenue over time. One option is to use your costs. Take the costs you've spent on the roofing project to date and divide that by your total costs.
So for example, say that you've incurred $200,000 in costs on a roofing project that you expect to cost $400,000. You have effectively spent half of your budget, and by extension, you should recognize 50% of the revenue you're going to receive on this contract.
Why recognize revenue over time
This accounting method may not seem logical at first glance. What if the client isn't paying for the roof until you're done? Why would you recognize the revenue before you receive it? First, many companies recognize revenue before they receive the cash. They recognize the revenue and send out a bill so they have a simultaneous increase in their accounts receivable.
By recognizing revenue over time, whether you've received it or not, you create a more realistic look at your profits and losses. If you just recognized expenses when they occurred and didn't recognize revenue until the end of the project, you'd have a lot of losses. Then, you'd have a quarter with a lot of profitability once you get paid.
By recognizing the revenue over time, you get a better sense of what's truly happening with your roofing company. To learn more or to get help with bookkeeping and accounting, contact a bookkeeper today. They can help you with recognizing revenue over time and the other more complicated aspects of bookkeeping for roofing contractors.Share