How to record it: a journal entry library for contractors

Most bookkeeping guides explain the theory of debits and credits. Contractors do not have a theory problem. They have a what do I do with this specific receipt problem, usually at 9pm, usually with the truck still loaded.

So this section is a library of real transactions. Each page takes one thing that happened, shows the exact entry, explains why each side is what it is, and flags the mistake people usually make with it.

The one rule underneath all of them

Every transaction has two sides, and they are always equal. That is not a formality, it is the error check. If you can name what the business got and what it gave up, you have the entry.

Take the simplest case. You pay $540 for lumber. The business got lumber for a job, which is the debit. The business gave up $540 of cash, which is the credit. Two sides, equal amounts, done. The complications in the pages below are only ever about which account each side belongs to, never about whether there are two sides.

You do not have to memorize that table. It is here because when an entry in one of these guides looks backwards, this is the thing to check it against.

The four entries contractors get wrong most often

1. Customer deposits booked as income. The money is in the account, so it feels like revenue. It is a liability until the work is done, and treating it as income inflates the profit you pay tax on.
2. Loan payments booked entirely as an expense. Only the interest is a cost. The rest is repaying debt, and getting this wrong leaves a loan on your books that never goes down.
3. Business costs paid personally, never recorded at all. The most expensive habit in the trades, because the deduction you never recorded is the deduction you cannot take.
4. Job costs that never get tagged to the job. They do not disappear, they just make the job look more profitable than it was, and then you bid the next one at that number.