Yet Another Basic Accounting Question

[Doug Laidlaw]

It depends on what you are in business for.  If you are in the business of 
building and selling houses, completed houses become stock-in-trade of the 
selling side of the business, and in principle, the whole profit on sale is 
taxable, just as with a retailer.  On the construction side, raw materials 
are purchases, except that instead of being resold, they are used in 
construction, and labour costs and subcontractors are a revenue expense.  
That way you can see if it is profitable to build them, or if it would be 
better to buy them for resale. (Of course with houses there are other 
considerations, such as location.  You can't put a bought house down just 
anywhere.)   The above approach implies that there is a mark-up in the 
manufacturing side, to get a price for the notional "sale" to the sales 
section.  Your books need to be capable of giving you management information, 
as well as figures for the tax man.  This is covered in my basic accounting 
text, but since I was a professional (a lawyer) I didn't have to learn about 
it.  And I am in Oz.

Doug.

On Fri, 21 Dec 2001 14:18, you wrote:
> I do some accounting for our local Habitat for Humanity even though I am
> not an accountant and the recommended procedure (from the actaul
> accountants at HfHI) is to carry everything
> that is part of the
> housebuilding process: materials, licensed plumbers, electricians, etc.,
> in an asset account (Construction in Progress is what we call the account.)
> Basically we are moving from one asset to another (cash in the bank to the
> house) This construction cost
> plus the land and infrastructure (sewer, water) becomes the cost of the
> house.
>
> This is of course not the same as the market value of the completed
> house. When you move in or try to sell it
> the asset will have its market value, which may be
> above or below what it cost you to build it. (a capital gain or loss,
> realized upon sale).
>
> Dale Alspach
>
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