Setting Up Job Cost Control Accounts

What Is A Control Account?

Control Account is the name for any General Ledger account that is automatically affected by the accounting system whenever a cost is posted to a subsidiary ledger (such as Job Cost or Equipment Cost).

How Are Control Accounts Assigned?

Once it has been determined which General Ledger accounts will be used as control accounts, enter a General Ledger Control Account for each job cost code using Job Cost Budget entry. There are short hand methods discussed here to make control account entry faster and easier. Once the control account is entered in Job Setup, the posting portions of Payroll, Accounts Payable, and other modules will post to the appropriate General Ledger control account whenever there is an associated cost in the subsidiary ledger.

Step 1: Control Account Structure

First decide how to organize the control account structure in the General Ledger. This is largely determined by which accounting method better suits the computer.

Which Accounting Method?

From a management standpoint, the best accounting method is traditionally believed to be the Percent of Completion method; however, tax considerations often dictate the Jobs Completed or Cash Basis methods of accounting. With this accounting software the operator can have the best of both worlds.

Converting the accrual based accounting methods (percent of completion & jobs completed) to the cash basis method is a simple operation. This is also true of converting the percent of complete to the jobs completed method. Therefore, the books may be run in the way preferred by management (i.e. percent of complete) and once a year, at fiscal year end, the books will be as dictated by the tax reporting method (if it differs from the method currently being used).

Where Should Control Accounts Appear?

As far as the computer is concerned, the only major difference between the percent of completion method and the jobs completed method is the section of the General Ledger Chart of Accounts in which the job cost and job income control accounts appear. The placement of these control accounts should be according to the following chart:

The underlying accounting theory governing this selection of accounting methods is beyond the scope of this document. The accountant, an accounting textbook, or other resources should be used to research this topic.

Step 2: Determine How Many Control Accounts

Management must evaluate its reporting needs in the General Ledger. Remember that the accounting system has excellent reporting through its Job Costing system and therefore will not require much detail in the General Ledger. It is probably best to review the account structure with an accountant and a representative of the software developer. Often, the need for certain accounts used for years in a business will be eliminated by the use of job costing and auditing reports.

The most common practice among contractors is to establish six control accounts for their Job Costing (i.e. Material, Labor, Subcontracts, Equipment, General and Burden).

Step 3: Enter Accounts

If using the Completed Jobs accounting method, just enter the Job Cost control accounts in the General Ledger Enter Accounts program and in the Job Cost Control Account section of Setup Accounting Options.

If using the Percent of Completion accounting method, there are further concerns which dictate which specific account numbers are selected.

As explained earlier under the Percent of Completion description, Job Cost control accounts should be in the EXPENSE section of the General Ledger. Job Income Control Accounts should be in the INCOME section. One of the primary objectives of a control account is that it always balances with the sum of all subsidiary (i.e. J/C or E/Q) accounts which use the control account.

If a control account is in the Profit & Loss section of the General Ledger Chart of Accounts, standard accounting procedures dictate that it must be zeroed at each year end.

In the case of a Job Cost Control Account, a job rarely, if ever, closes coincidentally with the year end. The conflict then is that control accounts in the P&L section of the chart of accounts must be zeroed at year end, but must also somehow maintain the job cost to-date. The solution turns out to be quite elegant.

One way of looking at year end closing is to consider it a large journal entry which simply reverses all P&L account balances and posts the difference to the Retained Earnings account.

For each control account in the P&L, add an associated account called Past Years Job Costs and apply the annual year-end closing or reversing entry (probably credit to this "associated" or "contra" account instead of the job-to-date Job Cost control account). To keep the esthetics of the P&L intact, it is probably advisable to make both the Job Cost Control Account and the past year recognized Job Cost account subsidiary accounts under a Master account called the Year-to-date Job Cost Account (the sum of the above two accounts).

To maintain further consistency, it is advisable to create the associated closed job account as a subsidiary as well (zero the balance of this account at year end).

If using the percent of completion method, enter the G/L account that was created using the Chart of Accounts Entry program.

The following is an example of Job Cost Control and Income Accounts:

Shorthand Method Of Control Account Entry

When setting up the system, and after a control account strategy has been developed, implement the strategy using three steps.

Implementation

Step 1

Using Setup Accounting Options, enter the control accounts that have been selected as well as the Closed Job Control Accounts.

Step 2

Using the Cost Code Entry section of Job Setup, enter each cost code. Each cost code will ask for the associated set of control account codes for Labor, Materials, Subcontracts, Equipment and General cost codes.

Step 3

When entering Job Cost Budgets and selecting cost codes, the default control account for these codes is retrieved from the Job Cost Code File entered in step 2. Another account may be typed at this time.

Note

Control accounts are assigned when a new job budget is entered. Changing the control accounts using cost code entry (Step 2) will only affect jobs created after revisions are complete. Changing control accounts using Step 1 will only affect Step 2. If no code is defined in Step 2, Step 1’s Setup accounts will become defaults for Step 3 (budget entry).