Spec & Custom Homes Bookkeeping Clean Up

My client, Kimberly, is the owner of a home building business and specifically Kimberly builds both Spec and Custom homes.

Kimberly hired AccuraBooks to catch up and clean up the entire bookkeeping system to help close out the previous fiscal year and to catch up the current fiscal year. Kimberly needed all of this bookkeeping work done so she can submit financial reports to try and obtain loans but also to be able to submit the financials to a CPA to file a tax return.

In a nutshell, besides catching up and cleaning up all of the bank and loan accounts via the reconciliations processes, I had to completely reorganize and catch up the Works In Progress and Cost of Goods sold and Income processes that were being utilized in the current bookkeeping platforms (front and back office platforms).

Spec Homes work is really just building a giant piece of inventory and thus all costs associated with this endeavor should be capitalized into a Works in Progress fixed asset/inventory type of account.

Custom Homes work, IF the monies received from the client, are spent immediately on labor and supplies, can probably be recognized for income statement purposes immediately; but if the owner or CPA (especially for tax purposes) decide to wait until the entire contract (or a percentage of it) with the client is fulfilled, then Custom Homes work can also be capitalized (like Spec Homes) as well (before adjusting journal entries are made later on to put the income and expenses onto a profit and loss statement).

Besides cleaning up the job codes items list to utilize for BOTH spec and custom homes work, I had to make adjusting journal entries to split and ultimately back out the over-inflated Works In Progress account and increase the Cost of Goods Sold accounts for the sold Spec Homes and the Custom Homes ongoing work and of course increase the income accounts for the sold spec homes.

Cleanup also had to be done as some of the sold Spec Homes loan interest payments had been booked directly back into the loan accounts (thereby creating a negative loan balance), plus some of the custom homes payments received from clients had been booked as loans (instead of income in this case).

This entire project for me took about 40 hours of work to complete. This included creating all new, more befitting, COGS and income accounts in the chart of accounts, then moving everything from the old COGS/income accounts to these new ones I created, and for both fiscal years.

A couple of summary catch up adjusting journal entries went as follows:

  1. Debit to Cost of Goods Sold (Custom Homes) and the offsetting credit to Works In Progress
    • This was to recognize the expenses for Custom Homes type of work because previously ALL of the same job codes were used for BOTH custom and spec homes type of work.
  2. Debit to Cost of Goods Sold (Spec Homes) and the offsetting credit to the various investor loan accounts.
    • This was to recognize the interest expenses paid to the investors and true up to zero the investor loan accounts because these spec homes properties sold and thus everyone was cashed out/settled.


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.

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