Accounting plays a crucial role in the success of every architecture, engineering and environmental consulting (AEC) firm. The foundation of an effective and robust accounting process facilitates financial management, project control, compliance, risk mitigation, and strategic decision making. It ensures that the AEC firm operates profitably, maintains financial integrity and sustains growth in a dynamic and competitive environment.
Considering accounting touches virtually every aspect of a firm’s operations, it’s no surprise that accounting for the AEC business is rather complex. A firm’s accounting system must integrate with other operational systems, handle multiple currencies, be able to function across multiple companies, maintain compliance with the standards and laws of various entities, and much more. Plus, there are accounting concepts unique to the architecture, engineering and environmental consulting industry.
For AEC firms, there’s an additional layer to the accounting side of the business: project accounting. A company can’t be profitable if the projects it takes on aren’t profitable. That’s why the project accountant’s role is so important. This key player in the accounting process bridges the gap between what the accounting team needs and what the project team provides. In this capacity, the project accountant must understand project management details enough to determine the appropriate accounting processes (contract fee type, revenue recognition, etc.) that should be applied for various types of projects. A project accountant needs to be able to speak both languages — accounting and project management.
With so many nuances, the accounting side of AEC can be a challenge. To help make it a little clearer, we’ve collected a list of general accounting terms and defined them as they pertain to the architecture, engineering and environmental consulting industry.
- 1099
- A collection of IRS forms used to report various types of payments a company or individual may make to a nonemployee person or entity (e.g., contractor compensation, rents, dividends, attorney’s fees, etc.)
- Accounts Receivable
- A historical overview of invoices delivered to clients for goods and services that are satisfied or outstanding
- Accrual Basis Accounting
- An accounting method that records revenue and expenses when they are incurred, regardless of when cash is exchanged
- Balance Sheet
- A key financial statement that illustrates the financial position of a company on a particular date, specifying all assets the company owns, all amounts it owes and all amounts owed to it
- Bank Reconciliation
- A statement process that explains the difference between the balance on a bank statement and the amount in an organization’s accounting records, revealing bank activity that has not yet been recorded and recorded transactions that have not yet posted
- Cash Basis Accounting
- An accounting method where revenue and expenses are recorded when cash is exchanged
- Chart of Accounts
- A listing of general ledger accounts that classifies the expense, revenue, assets and liabilities of a company using a standard numbering system
- Expense Report
- A report that tracks employee expenses incurred while performing their job functions — the company may choose to pay the expenses directly or reimburse them to the employee
- Financial Allocation
- A system of dividing income and expenses among various branches and departments of a business based on different criteria (e.g., the number of employees, square footage, revenue earned, etc.)
- Financial Budgeting
- An estimate of income and expenses over a specified future period that attempts to consider future conditions and company objectives
- Foreign Exchange Accounting
- The positive or negative difference between the expected and the actual amount received due to currency fluctuation when a transaction is created in a currency that differs from a company’s functional currency
- General Ledger
- The main accounting record of a company that holds all the financial transactions by accounting period — used as the primary source of information for a company’s financial statements
- Generally Accepted Accounting Principles (GAAP)
- A collection of commonly followed accounting rules and standards for financial reporting, which can vary by country (e.g., ensuring debits and credits match, identifying the currency in which a transaction occurred, using specific time periods, etc.)
- Intercompany Transactions
- Activities conducted between a parent company and its subsidiary or between two subsidiaries of the same parent
- International Financial Reporting Standards (IFRS)
- A set of international accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB) to describe how transactions or types of events should be treated when reporting
- Overhead
- Expenses that do not directly generate revenue but are necessary to maintain business operations
- Payroll
- List of a company’s employees and the amounts they are to be paid
- Prevailing Wage
- An acknowledgment to compare payroll cost to local average wages on public work projects for laborers and mechanics. When establishing the prevailing wage, the higher of the compared value of payroll cost versus the local average wage is paid to the employee. This was enacted by the U.S. Davis-Bacon Act of 1931. The aim is to ensure that all contractors bidding on public construction projects will pay family-supporting wages and that these projects will be built to the highest standards by skilled, safe, well-trained construction craftspeople.
- Profit and Loss Statement
- A financial statement that reports the revenue and expenses a business incurs during a specific period of time
- Recurring Journals
- A journal entry associated with a particular transaction that is recorded in every accounting period
- Sales Tax
- A consumption tax imposed by a government on the sale of goods and services (e.g., value added tax (VAT), direct sales tax, excise tax, etc.)
- Statistical Accounts
- Non-monetary accounts holding statistical values that can be used for reporting purposes (e.g., hours worked, units sold) or analyzing monetary accounts (e.g., revenue by employee)
- Subsidiary Ledger
- A supporting ledger providing more detailed information about an individual account than a general ledger (e.g., receivable, payable, work in progress (WIP), etc.)
- Tax Authority
- A government entity authorized by law to assess, levy and collect taxes
- Taxable Payments Annual Report (TPAR)
- An annual tax return required by the Australian Taxation Office (ATO) that describes payments made to vendors by Australian-based companies whose principal business is building and construction services
- Trial Balance Report
- An internal report listing the ending balance in each account for a particular financial period, primarily used to ensure that total debits equal total credits, with any difference being reported as a discrepancy on the report
- Uncompensated Overtime
- The hours worked without additional compensation in excess of an average work week, as defined by local law, by direct charge employees who are exempt from overtime pay
- Value Added Tax (VAT)
- An incremental excise tax applied at each stage of production and distribution
- VAT Reporting
- A report alerting the taxing authority to the amount of tax collected versus the amount charged
- Work in Progress (WIP)
- The portion of project revenue yet to be billed
Accounting is fundamental to the health of an AEC firm, supporting financial management, transparency and strategic decision making. From cash management to the billing process, accounting for AEC relies on understanding how all the standard business and project-specific processes work to relay relevant information to key decision makers. Additionally, the complexities of the architecture, engineering and environmental consulting business require that, to be successful, firms have the foundation of an effective and robust accounting process tailored to their specific needs.
We hope this collection of terms helps make understanding the ins and outs of accounting for AEC a little easier. Check out our blog for more accounting-related resources, like a breakdown of how our solutions support ASC 606 compliance as well as a deep dive into the difference between DSO and DPO.
