Yet Another Basic Accounting Question

Dale Alspach alspach@math.okstate.edu
Thu, 27 Dec 2001 10:40:06 -0600


I think you need to decide what your purposes are in doing the
accounting. For determining net worth you want a dollar value on everything
based on a "market value". If you want an accurate accounting of the cost
of building the house that is integrated with the market value, I suggest
that you have an asset account house which is a shell for some subaccounts:
construction materials (broken down further if needed), labor (if you want
to put a value on your labor), market margin (or split this into two margin
accounts: loan margin (the difference between cost of materials and labor
and the amount you can borrow) and market margin (the additional value
added or loss due to market pricing). Unless you have a real need for more
detail I would go with just two subaccounts: cost of construction and margin.

Your construction loans go into a liability account with a corresponding
entry in some (liquid) asset account such as a checking account. As you buy
materials or pay for professional assistance with the building the liquid
asset account will decrease and the cost of construction will increase the
same amount. If a market value is established somehow that will cause an
adjustment in the margin. This will come from some sort of income account
for appreciation or capital gain (or depreciation or loss). For
construction in progress what the bank lends is not really a market value
at the present time, but a bet on the future value based on what your plan
is and their prediction of your ability to complete the construction and
repay the loan. I would not use future value as the value of the house. I
would use the amount of the loans and any other capital  that has been put
into the construction unless some part of the project has been given an
actual market value.  

For example, if you built a barn first to use for storage of
construction equipment and materials and it has an office that you use for
business purposes, the barn may have a market value of $30,000. On the
other hand the cement slab with only the framing for the house, may have a
market value below that of the materials. Nevertheless I would use the cost
of materials to give a present value to the house portion and the market
value for the barn.

As for your question about your loan payments these will decrease some
asset acount such as a checking account and decrease the liability account
for the constructions loans by the principal portion and the remaining
portion for interest, escrow, etc., will go into some expense accounts. I
think one could argue that during the construction phase these amounts are
actually part of the cost of construction (a professional builder would
probably do that). Because you are doing the construction yourself over an
extended period of time, this might artificially inflate the cost. That
might be to your advantage under some tax law scenarios by making the cost basis
high and thereby reducing the size of any capital gain when the house is
sold.

Dale Alspach