Sale of Spec Home – General Balance Sheet Overview

It is important to have a general outline of how to handle the sales of your speculative homes (spec homes) in your bookkeeping system.

Typically, all of the purchases (including land, materials, labor, etc) related to the construction of the speculative home would have been capitalized (put into asset type of accounts on the balance sheet) as you, the home builder, are speculating (and hoping) for a profit that will be recognized upon the sale of this type of new home.

The recognition of this profit (or loss) comes when all of the associated purchases that are currently residing within various asset accounts are now all closed out (moved) to income statement type of accounts: the expenses and income. Then, the net difference between the income and expenses will be your profit or loss for your speculative home construction project.

Please don’t forget: There will also be liability (loan) accounts to close out as well since, most likely, your spec home construction projects will be financed by a lender (or even perhaps an investor).

Here is a general balance sheet account list to help ensure associated balance sheet transactions are closed out (moved to) the income statement (upon the spec home sale):

• Construction Escrow: This asset account should begin with a balance and automatically end up at zero when all of the escrow monies are used up.
• Land/Lot Purchase: This asset account recognized the original land/lot purchase before construction began.
• Construction Loan: This liability account perhaps bundled up the finance of the associated construction escrow and lot purchase.
• Construction-In-Progress (Works-In-Progress): This is the balance sheet account that will hold all of the materials and labor purchases during the construction of the speculative home.

In a future article, I will discuss the income statement type of accounts where all of the associated transactions, that originated in the above-mentioned balance sheet account, will end up.

Note: AccuraBooks is a bookkeeping firm only, so please consult with your C.P.A. for verification and clarification about the contents of this article.