Owner, Home Building Company

by Dave

Construction Loan Draw

Construction Loan Draw

Having difficulty with getting the following transaction(s) recorded:
$100 construction loan draw
draw is to pay $100 in building costs for a home that will finished and sold in 6 months

the draw increases the loan in Liabilities
increases cash which came from the loan
increases the asset/work in progress
decreases cash in order to pay the vendor (cost)
increases COGS

Not sure if it matters but I’m on a cash basis and I’m using QuickBooks. Though I probably learned this many years ago in college, I’m having difficulty at this point. Can anyone help?

Thanks in advance.

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From what you are saying, I think you are recording your entries in QuickBooks as follows:

A construction in progress account is opened on the books for a specific home or homes being built. Costs that may be immediately expensed are normally not booked to construction in progress. If you want to track the non-capital expenses as well, you may decide to setup sub accounts under your construction in progress account - one for capital costs and one for non-capital costs. I will ignore non-capital expenses in the following entries.

DEBIT Construction in Progress - Capital Costs
CREDIT Cash ... or Accounts Payable (Vendor ABC) if you were using accrual basis accounting

To record building supplies purchased that are capital in nature

CREDIT Construction Loan - I assume this is some type of line of credit you have prearranged and can draw on

To record construction loan draw

DEBIT Accounts Payable (Vendor ABC)

To record payment to vendor ABC for construction supplies - this would be if you were using accrual basis accounting instead of cash basis accounting

I haven't done construction accounting since I was a student but it seems to me that your cost of goods sold would not be affected until the sale of the home as follows:

DEBIT Inventory - Homes for Sale
CREDIT Construction in Progress - Capital Costs

To record completion of home that is available for sale and close the construction in progress account

DEBIT Cash or Accounts Receivable
CREDIT Home Sales

DEBIT Cost of Goods Sold - Homes Sold
CREDIT Inventory - Homes for Sale

To record sale of home

Having gone through this exercise, a $100 purchase suggests to me that this amount can likely be expensed rather than capitalized. If you are tracking total costs to build the home, you would likely run this expense through the non-capital subledger prior to expensing it.

DEBIT Construction in Progress - Noncapital Costs
CREDIT Cash ... or Accounts Payable (Vendor ABC) if you were using accrual basis accounting

To record building supplies purchased that are to be expensed

DEBIT Cost of Goods Sold - Expenses
CREDIT Construction in Progress - Noncapital Costs

To record expensing of non-capital costs

When recording cash basis purchases, I assume you have valid receipts for your purchases to support/substantiate your purchase just as you would using the accrual basis method of accounting.

If you are looking for help with what should be capitalized versus what can be expensed, read more here ...

I'd verify this with your accountant because like I said, I haven't dealt with construction bookkeeping since I was a student.

A note to small business owners in Canada - you must use accrual based accounting for your record keeping. Cash basis accounting is only permitted for farmers and fishermen in Canada. Read more here ...

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