Charter of Accounts
Simplified
Balancing the Balance Sheet
What does COA Mean? As an Owner in a Construction Company, You Need to Know What This Means!
A chart of accounts (COA) is an index of all of the financial accounts in a company's general ledger. In short, it is an organizational tool that lists by category and line item all of the financial transactions that a company conducted during a specific accounting period.
Most construction companies incur basic accounting inaccuracies. Typically, construction companies current chart of accounts significantly limits the usefulness of their accounting data for management purposes.
Simplifying & Understanding Your Financial Transactions
A brief examination below of a company’s financial statement highlights the shortcomings in both the chart of accounts and their reporting practices:
-
Income Not Classified by Profit Centers: The lack of classification makes it challenging to analyze profitability across different projects without significant effort.
-
Improper Income Classification: Revenue streams are not accurately categorized, hindering clear financial insights.
-
Cost of Goods Misstated: Construction costs are inaccurately reported, affecting overall profitability assessments.
-
Gross Profit Margins Misrepresented: Gross profit margins do not reflect true performance, leading to misguided business decisions.
-
Lack of Actual vs. Planned Reporting: Financial statements fail to compare actual performance against planned budgets, limiting strategic oversight.
-
Wages Misclassified: Employee wages are not categorized correctly, complicating cost analysis and labor management.
-
Owner’s Compensation Blended with Other Wages: There is insufficient separation between owner compensation and regular wages, obscuring true labor costs.
-
Net Profit Excludes Interest and Other Expenses: Net profit calculations do not account for interest and additional expenses, resulting in an incomplete financial picture.
-
Depreciation Not Properly Tracked: Asset depreciation is inadequately monitored, affecting financial reporting and tax calculations.
-
Misunderstanding of “Negative Assets: The concept of a "negative asset" is incorrectly applied, leading to confusion in asset reporting.
-
Current Assets Misreported: Current assets are not accurately reflected, which may mislead liquidity assessments.
-
Improper Posting of Accounts Receivable: Accounts receivable entries are inaccurately recorded, affecting cash flow analysis.
-
Current Liabilities Misreported: Current liabilities are inaccurately classified, distorting the company's financial obligations.
-
Unrealistic Inventory Reporting: Inventory levels do not reflect actual conditions, leading to misguided inventory management strategies.
-
Current Liabilities Listed as Long-Term Debt: Current liabilities are incorrectly categorized as long-term debt, misrepresenting the company’s financial position.
-
Balance Sheet Imbalance: The balance sheet does not balance, indicating significant discrepancies in accounting records that need urgent correction.
Transforming and Simplifying Your Accounting Practices
Addressing these issues will enhance the financial clarity and facilitate better decision-making for construction companies. Until these structural deficiencies are addressed, a company's accounting will have minimal managerial value. Shapcott and Lauber can transform your accounting practices into a powerful tool for managerial decision-making, ultimately driving your business's success.