the owner $207,000. Otherwise, the profit figure used is incorrect. Invoices have been entered on the books aggregating $201,300. The difference of $5,700 represents cost of work billed to the owner for which invoices have not been entered on the books and represents sums for material, subcontracts, etc., which have to be paid in addition to those shown by trial balances.

The other items appearing as assets or liabilities are selfexplanatory.

No reference is made in the balance sheet to "deferred charges to income" or "deferred credits to income." Prepaid accounts and deferred income accounts are not generally serious factors in construction work. Take "prepaid insurance" which is commonly a "deferred charge to income." Fire insurance premiums are mainly in connection with construction work, except possibly those for insurance on office furniture, construction equipment, and buildings owned by the contractor as an investment, not as construction projects. The premiums arising out of construction work are by far the greater part of total premiums paid by a contractor. They are charged to the cost of construction when paid. Rebates are applied as credits to construction when obtained. The ordinary "prepayment" condition does not exist. The general theory of prepaid account and deferred income accounts is well understood— that is, carrying to a subsequent fiscal period expenditures made in a prior period, when such expenditures have a direct bearing on determining the result of operations for the subsequent period. Very few items of this character exist in such volume in the construction industry as to have any serious effect on comparative statements of the result of operations in different periods. When any particular expenditure in a contractor's office is large enough to justify setting up either a "deferred charge" or a "deferred credit to income," it should appear on the balance sheet.

Contingent Liability on Discounted Notes

Any contingent liability the contractor may have on notes receivable discounted appears on the balance sheet as follows

This would indicate that the contractor had on hand undiscounted notes receivable of $1,000 and that he had discounted notes with a face value of $11,000, which had a value at maturity of $11,500.

Capital Location

The balance sheet has two sets of columns shown, one of which is marked "Capital Location." The total of the trial balance figures appearing in this column is added to the total of the second column. These latter figures represent the balance sheet proper.

The purpose of having a Capital Location column arises from the fact that a contractor's capital, whether his own or borrowed capital, is principally invested in construction work to pay payrolls, material bills, and subcontractors. This investment in construction contracts practically represents his working capital, except cash in the bank. It is, therefore, extremely important to know what this investment is and where it is. The amount indicated on the balance sheet as the "Investment in Construction Contracts" controls the collection and disbursement figures appearing on the statement of uncompleted con

tracts.

Reference to the statement of uncompleted contracts (Form 24) shows that the total cash paid out on all contracts is

$1,643,000, and the total collections $1,641,600, or a net excess of cash disbursements over receipts of $1,400. The profit of $189,150 is added to this actual cash investment of $1,400, giving the total of $190,550, the amount shown on the balance sheet. The profit is added to cash excess in determining net investment because payments by owners are settlements of selling prices and include the cost of the work, plus the contractor's profit. This profit is collectible as work progresses. Strictly speaking, the $189,150 includes profit earned during October. The payments of $1,641,600 represent collections to the end of October, but are largely based on work done to the end of September. This has no serious effect, however, as one object is to have a balance sheet figure that controls the accuracy of the statement of uncompleted contracts. A study of each contract appearing on this statement enables the contractor to see which operation has a greater amount of cash invested in it. than should be.

The investment in each contract, based on figures appearing in Form 24, is as shown on page 243.

Conversion from Accrual to Cash Basis

The following rule is therefore established for converting any contractor's books from an accrual basis to a cash basis: From the sum of the amount "Due from Owners" and "Unbilled Construction" costs, deduct the sum of unpaid accounts on jobs and unbilled accounts payable. The reason this is true can be readily seen by reference to the analysis given of Construction Accounts, Owners, and Accounts Payable on pages 215, 216. Eliminating from the Construction and Accounts Payable accounts items amounting to $1,799,700, which are really journal entry in effect, and from the Construction and Owners accounts the bills amounting to $1,991,600, which also are journal entry in effect, the remaining factors in these three sets of accounts represent cash, i.e., Payments by Owner, $1,641,600, and Payments to Creditors, $1,643,000.

The analysis of unpaid accounts, according to the amount in connection with which liabilities were incurred, may develop that some unpaid liabilities apply to general accounts, such as General Expense, Equipment, etc. Such amounts should be listed in the Capital Location column following Interest Payable. If the creditor's account had been $24,200, instead of $21,200, and the $3,000 represented unpaid purchases of equipment, the amount given in the last column would still be $179,100, and the $3,000 would be shown in the center. This is for the purpose of carrying out the primary object of the Capital Location column, which is to show Investment in Construction Contracts. It is not intended as a strict accounting for cash invested in the business. Such a statement would have to be prepared separately and could not be combined with the balance sheet. The form given herein accomplishes the purposes for which it is intended.

CHAPTER XVII

FINANCIAL STATEMENTS

MISCELLANEOUS

ANALYSIS OF EXPENDITURES

Underlying Conditions

As explained in Chapter III, the economical management of office and field work requires that headquarters be provided in the contractor's main office for certain employees whose activities are as of material assistance in the prosecution of construction work as those of the superintendent and other members of the job organization. Inspectors of material, tracers and expediters of material shipments, draftsmen, and engineers are among those included in this category. Their salaries are charged to individual jobs solely to the extent of actual time devoted to them. The balance of their salaries is charged to General Expense and represents services rendered that are not directly connected with any job under contract or covers idle time through illness, holidays, etc.

Salaries of these men are included in construction costs, as they render individual services from which the operations derive an immediate and a direct benefit, as fully described in Chapter III. When these charges are against cost-plus contracts, the contractor collects the amount thereof from the owner, provided the guaranteed maximum price has not been exceeded.

A charge against a lump-sum contract resolves itself principally into a matter of accounting. These salaries and those of the job organization are as much a part of construction costs as carloads of cement or brick. Viewed practically; how