QuickBooks / Financial Review

1. QuickBooks / Financial Review Financial Reports Usability Percentage of Completion Adjustment

2. Financial Reports Usability • In order to use reports as evaluation tools of your business they must reflect the Income not just the collections. • As you complete work for clients you produce Income for your business. It is not the collections that define Income, it is the value of work produced that determines Income. • Accrual Accountingshows the performance of your business over a period of time by reflecting the economic reality of business not just cash flow. Although the accrual method of accounting requires a bit more work, the result is more useful and meaningful financial reports. • The timing of cash receipts and payments can vary greatly from the time the work was completed. The timing disconnect between cash collections and job activity creates problems with comparability in financial statements from month to month.

3. Why Adjust for % of Completion • By recording deposits in QuickBooks as revenue we are using the cash method of accounting (cash collected = revenue). • Cash collected prior to starting work and purchasing materials is not revenue, it is a liability to do work for a client. A month end adjustment is necessary to record customer payments as deposits when the payment are in excess of the % of work completed. • The % of completion adjustment is required to have meaningful financial statements.

4. Red House % of Completion Report • This report should be used to identify adjustments to monthly revenue • % of completion = the ratio of actual cost / estimated costs. • Revenue = sales price * % of completion • Revenue is then compared to the cash collected • If revenue is less than the cash collected the report displays a negative adjustment to revenue and vise versa.

5. Making the % Completion Entry • 1) Print the % Completion report from RedHouse • 2) Determine if you have over or under recorded revenue • Positive balances mean you have earned money not yet collected • Negative balances mean you have collected money that has not been earned • 3) Make end of month adjusting journal entry (see screen shots for example) • Date entry the last day of the month • Use the following accounts • 1300 · Costs in Excess of Billings – asset account reflects work completed but not collected • 2480 · Billings in Excess of Costs – liability account reflects cash collections on work which has not been completed • 3200 · % of Complete Earnings – Revenue Account

6. Percent of Completion Report Additional Revenue to accrue Over stated Revenue

7. Making the % Completion Entry Make Journal Entry % Completion Report Analysis If Report Over/Under Total is Positive then The entry is Increase Revenue (credit) Increase Assets for unpaid completed work (debit) Debit Credit 3200 · % of Complete Earnings $ ### 1300 · Costs in Excess of Billings $ ### If Report Over/Under Total is Negative then The entry is reduce Revenue (debit) Increase Liability for uncompleted work (credit) Debit Credit 3200 · % of Complete Earnings $ ### 2480 · Billings in Excess of Costs $ ###

8. Making the % Completion Entry • 4) Make reversing entry • Reversing entry removes the prior month accrual. Make the reversing journal entry dated the 1st of the next month noting that the account entered previously as a debit now becomes a credit and credits become debits. Reversing Entry dated day 1 of next month If Report Over/Under Total is Positive then Reversing Entry is made with the same amounts used at the end of last month Debit Credit 3200 · % of Complete Earnings $ ### 1300 · Costs in Excess of Billings $ ### If Report Over/Under Total is Negative then Reversing Entry is made with the same amounts used at the end of last month Debit Credit 3200 · % of Complete Earnings $ ### 2480 · Billings in Excess of Costs $ ###

9. % Completion Considerations • The Red House report Percent of Completion is only a guide to make your adjustment. • The report is only as good as your original estimates. • If jobs are running over budget or there is a high risk that they will not be completed within budget you need to manually adjust the calculations and totals on the report. • Be very careful making adjustments that increase your current month’s revenue (be conservative in your evaluation of job status.)