Financial reporting
Financial statements show whether your company is healthy, and banks and sureties read them before giving credit or bonds. The exam checks that you know the three main statements, cash vs accrual accounting, percentage-of-completion vs completed-contract, where costs belong, and what the basic ratios mean.
Good records come first. The IRS explains that a recordkeeping system summarizes business transactions in journals and ledgers. A journal records each transaction from supporting documents such as invoices, receipts, and deposit slips. A ledger holds the totals, organized by account. Financial statements are built from the ledger.
Single-entry vs double-entry bookkeeping
A single-entry system is based on the income statement and tracks cash receipts and payments. It is simple but has no built-in checks. A double-entry system records every transaction as a debit in one account and a credit in another, so total debits must equal total credits. If they don’t, there is an error. Double-entry gives built-in checks and balances and is the basis for a full balance sheet.
Chart of accounts
A chart of accounts is the numbered list of every account in your ledger. Most small contractors group accounts in the same order as the financial statements. Setting up separate accounts for direct job costs and for general and administrative costs lets you see job profit and overhead clearly.
| Typical number range | Account group | Examples |
|---|---|---|
| 1000s | Assets | Cash, accounts receivable, retention receivable, equipment |
| 2000s | Liabilities | Accounts payable, payroll taxes payable, loans |
| 3000s | Equity | Owner’s capital, retained earnings |
| 4000s | Revenue | Contract revenue, change order revenue |
| 5000s | Direct job costs | Field labor, materials, subcontractors, job equipment |
| 6000s–7000s | General and administrative (overhead) | Office rent, office salaries, advertising, sales vehicle depreciation |
The number ranges above are a common convention, not a legal rule. What matters for the exam is knowing which group a cost belongs to.
The balance sheet
The balance sheet shows what the business owns (assets), what it owes (liabilities), and the owners’ share (equity) on one specific date. It is a snapshot. It always balances: assets = liabilities + equity. Current assets are expected to become cash within one year; current liabilities are expected to be paid within one year.
Know this
Assets = Liabilities + Equity.
| Balance sheet, December 31 | Amount |
|---|---|
| Cash | $60,000 |
| Accounts receivable (including $20,000 retention) | $140,000 |
| Costs and estimated earnings in excess of billings (underbillings) | $10,000 |
| Total current assets | $210,000 |
| Equipment, net of depreciation | $190,000 |
| TOTAL ASSETS | $400,000 |
| Accounts payable | $90,000 |
| Payroll taxes payable | $15,000 |
| Billings in excess of costs and estimated earnings (overbillings) | $25,000 |
| Line of credit balance | $20,000 |
| Total current liabilities | $150,000 |
| Long-term equipment loan | $100,000 |
| TOTAL LIABILITIES | $250,000 |
| Owner’s equity | $150,000 |
| TOTAL LIABILITIES + EQUITY | $400,000 |
The income statement (profit and loss)
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