Chart of accounts:

Chart of accounts lists all the accounts which are required to organize the financial information of a construction firm. The accounts mentioned in chart of accounts are used to prepare the financial statements namely income statement and balance sheet of the firm. The accounts listed in chart of accounts are assets, liabilities, net worth, revenue, expenses and tax. In chart of accounts the components of balance sheet i.e. assets, liabilities and net worth are listed first followed by the components of income statement i.e. revenue, expenses and tax. Each account in the chart is assigned by a reference number for easy identification.

Financial statements

As already stated in Lecture 1 of this module, financial statements are used to indicate the financial status and evaluate the performance of a firm. The most important financial statements are income statement and balance sheet (already mentioned).

Income statement (or Profit and Loss statement)

Income statement is a summary of revenues, expenses and the resulting profit or loss of a firm for a stated period of time, usually the fiscal year. The income statement is also referred as profit and loss statement. It records the revenues and expenses in the interval between two balance sheets. It provides information about net profit or loss of the firm, thus indicating whether the firm is running the business with profit or loss. Profit is the excess of revenue over the expense. Through income statement, it is possible to track the performance of the firm during the stated period of time by analyzing the revenues and the expenses. Revenues represent the cash inflows earned in the exchange of services provided whereas the expenses represent the cash outflows, the firm spent for providing the services. In income statement the operating revenues and expenses represent the income and the expenditures those are associated with the core operations of the firm whereas the nonoperating revenue and expenses represent the income and expenditures from sources other than the core operations. For construction firms the operating revenues represent the earnings against the services provided i.e. earnings against the completion of portion of work or entire work of the projects. The operating expenses represent the construction costs (both direct and indirect costs) i.e. material cost, equipment cost, labor cost, cost of subcontracted work and the overhead cost. As already mentioned in Lecture 1 of Module 5, the direct cost includes cost of materials, equipment and labor associated with each item of work, along with subcontracted costs whereas the indirect cost (overhead costs) is calculated for the entire construction project rather than allocating for each item of work in the project. In income statement, the nonoperating revenues include the interest earned and the revenue earned from sources other than the core operations (i.e. construction operations) of the firm. The nonoperating expenses include interest payments on loans and other expenditures which are not associated with the construction operations of the firm.