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T
TWBookkeeping
July 12, 2024
Question

Booking a spec home loan, contruction costs, payments and when sold

  • July 12, 2024
  • 1 reply
  • 0 views

I have a new home building client who builds spec homes.  I need the workflow for how to book the loan, book the construction costs throught the end of construction, then the entries when the home is sold. 

I have seen one suggesstion to book it as an asset and call it "work in progress" then charge all the construction costs to that acct.

 

Thanks in advance

1 reply

Rainflurry
Rainflurry
July 12, 2024

@TWBookkeeping 

 

The loan is recorded like any other loan - create a deposit and assign the loan payable liability account to it.  As you mentioned, constructions costs should be capitalized into a 'Construction in Progress' (CIP) asset account.  When the home is sold, there are a few ways to enter that transaction.  I prefer a journal entry that closes (credits) the CIP asset account, closes (debits) the loan payable liability account, debits the bank account for the cash received, and credits Income to balance the journal entry.  

T
TWBookkeepingAuthor
July 22, 2024

@Rainflurry Thank you for the response!  I am new to working with a home builder and still need some help/clarification.

The builder gets a loan, however; normally only pays interest payments during construction and pays the loan off when sold.  So do I set up a liability acct with no balance until they take a draw? If a draw is taken, just add the draw amt to the liability acct?

Setup the WIP asset acct for each home and begin categorizing purchases/costs from credit cards, checks, etc to the WIP accts.

Once the home is sold, create and debit an expense acct maybe called "construction expenses/costs" and credit the WIP asset acct to zero it out. 

How do I handle the deposit when the home closes in this scenario?  Also, is there any way to categorize construction costs going into the WIP asset accts such as: subcontractor, material, equipment, overhead, etc.?   Thank you in advance for your help!

Rainflurry
Rainflurry
July 24, 2024

@TWBookkeeping 

 

Here's my $.02:

 

"So do I set up a liability acct with no balance until they take a draw? If a draw is taken, just add the draw amt to the liability acct?"

Correct.

 

"Setup the WIP asset acct for each home and begin categorizing purchases/costs from credit cards, checks, etc to the WIP accts."

Yes.  You can (and should IMO) create WIP sub-accounts as you see fit (subcontractor, material, equipment, overhead, etc.).  Then, as you mentioned, close out all the WIP accounts to expense accounts with a journal entry.

 

"How do I handle the deposit when the home closes in this scenario?"

With a journal entry that looks something like this:

 

 DebitCredit
Bank account (deposit)XXX 
Expenses (to close all WIP asset accounts)XXX 
LOC liability (to close if applicable)XXX 
    WIP accounts (to close all) XXX
    Income (to balance) XXX

 

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