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PART I

CONDITIONS UNDERLYING THE

ACCOUNTING SYSTEM

CALIFORMA

CHAPTER I

THE CONSTRUCTION INDUSTRY AND ITS

PROBLEMS

Method of Presentation

Before taking up the accounting system of the construction industry, it is advisable first to discuss the problems of the industry and the various records kept in the field and outside of the accounting department. No accountant would undertake the audit of a large manufacturing plant without first visiting the shops, storerooms, and receiving and shipping rooms, to acquaint himself with operating methods, as only thus could he correctly interpret transactions appearing on the books of account and auxiliary records. A knowledge of underlying conditions, therefore, is essential to the proper understanding of the accounts and the accounting system of any industry, and for that reason, the chapters of Part I in this book are devoted to a discussion of the field and operating conditions, including the field records, underlying construction accounting.

Furthermore, as the construction industry embraces many different branches, it is necessary to emphasize at the outset the distinction between general accounting and cost accounting, the one leading up to the balance sheet and the other to an analysis of production costs. The difference between the various branches of the industry lies in the character of work done, such as road building, erection of bridges, construction of buildings. All branches, however, involve employment of labor and payment of wages, purchase and handling of material, use of contractor's equipment, and the subletting of parts of the work, etc. The theories for general accounting and the method of applying them in formulating a system are, there

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CONDITIONS UNDERLYING ACCOUNTING SYSTEM

fore, exactly the same in all, and are explained in Part II. Accounting entries may vary in number and in class but the theories and the general system for the industry do not.

The component parts of the aggregate cost of various construction jobs differ, but this condition affects the method of accumulating costs for determining costs of production and has no bearing on recording expenditures for balance sheet purposes. It affects only cost accounting, the basic theories of which are given in Part III of this book, and from which a cost accounting system for any branch of the industry can be formulated.

Part IV deals with the accounting systems used in the owner's and the architect's office.

The Construction Industry

The construction industry is vast and varied in character, and employs, directly and indirectly, great numbers of men. Statistics fail to give an adequate idea of its scope. It embraces the building of homes, apartments, hotels, department and other stores, theaters, churches and other religious places, hospitals and charitable institutions, schools, colleges and educational centers, courthouses, capitols and other governmental buildings. It provides factories, mills, warehouses, loft, office and other business structures. The industry covers the construction of utilities, such as dams, reservoirs, canals, bridges, docks, power houses, railroads and tunnels, telephone and telegraph lines, trolley systems, public highways, etc.

No single construction organization can be sufficiently skilled in all these lines of work to prosecute any and all efficiently and economically. Organizations specialize in and confine their activities to certain of these branches, such as the building of homes and apartments, the erection of the larger type of buildings, the construction of dams, docks, bridges, or railroads.

Field Problems

Of the field problems in the construction industry, there are first those of securing capable men for the organization. The industry is not like the business of selling merchandise of some well-known brand where the quality of the goods is its own advertisement. It can only offer for sale the mental and physical skill of the men engaged in it. Men must be selected for individual ability along specified lines and the work of all must be co-ordinated.

The welfare of the men also presents a field problem. If the work is not close to a city or town, temporary houses have to be constructed, meals must be supplied, and entertainment provided. When workmen become ill or meet with accidents, hospitals must be available.

Then there are production problems based on the knowledge of man-production. The contract with the owner fixes a definite time when the entire work must be completed. A time schedule must be planned so that all trades employed at the site can work in such sequence as to assure there being no delay in completing the entire structure within the time specified in the contract and without incurring additional cost through working mechanics overtime.

The contract price (selling price) is established before physical work is begun. The cost of production of the different units of work must be carefully watched during the progress of the work so that the actual cost of performing it will not exceed the estimated cost and thereby reduce or eliminate the profit contemplated when the contract was signed.

Problems are presented by the statutes of the federal and different state governments and the ordinances of municipalities affecting details of construction. All these various statutes, ordinances, and regulations of 'municipal bureaus must be borne in mind, and followed to prevent violations, which would interfere with the performance of the work.

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