“Expenses” and “costs” are often used interchangeably. This may be harmless in conversation, but in accounting and pricing it can distort the picture: a project appears profitable, yet there is no spare cash.
Confusion usually arises in two situations. The first is when money has been paid out but the work has not yet been closed out. The second is when spending on individual jobs gets mixed up with company spending on the office, sales, services and taxes.
Below, we use working definitions for accrual-based management accounting: costs measure the value of resources consumed, while expenses are amounts recognized in calculating profit for a period. This method is intended for internal reporting; it does not replace the applicable financial accounting and tax rules. We will examine what belongs to a project or the company, what affects profit for the period, and what remains in work in progress.
Contents:
Payments, costs and expenses: three distinct layers
The selected model distinguishes three layers. In construction, payment, delivery of materials, completion of work and acceptance of a project stage can take place at different times. These events do not have to follow a fixed sequence: a resource may be received and used before it is paid for.
A payment is a movement of money: an outgoing or incoming transaction through a bank account, card or cash fund. A cost, in this management accounting model, is the monetary value of a resource consumed: materials, labor, the use of equipment or a service. An expense is an amount that reduces the financial result for a period under the established method: it is included in the cost of completed work, selling expenses or administrative expenses. Purchasing inventory or a fixed asset, or making an advance payment, does not by itself mean that a resource has been consumed or an expense has arisen.
| Term | What it records | The question it answers | Renovation example |
|---|---|---|---|
| Payment | Money paid out or received | “How much money is in the account, and where did it go?” | You paid a supplier’s invoice |
| Cost | A resource consumed to achieve a result | “How much did the resources consumed in carrying out the work cost?” | Materials were charged to the job, and the crew worked its shifts |
| Expense | A cost recognized in the period’s profit calculation | “How much did the business earn during the period?” | The costs of completed work were included in the profit calculation under the established method |
These three layers help you spot a common mistake: “money has gone out” does not yet mean “an expense has arisen.” If the rules of the selected model are met, an expense may be recognized before payment; the company still owes the contractor. Payment, a work acceptance document or the closure of a project stage does not, on its own, determine a universal point for recognizing an expense.
What are costs?
In the selected management accounting model, costs are the monetary value of resources consumed in carrying out work and achieving a result. Purchasing materials creates inventory; using them generates costs of the work. For tools used over an extended period, the purchase and the cost of using the tools are accounted for separately. Looking at costs by project makes it easier to see which costs relate to a specific job and which support the company as a whole.
In practice, costs are divided into direct and indirect costs. Direct costs can be reasonably attributed to a specific job: materials used, work performed, delivery to that address, and the use of rented tools for the task. Indirect costs support several projects or the company as a whole: the office, bookkeeping, some management activities, advertising and communications. The management accounting method sets out the rules for including these amounts in the cost of work or in expenses for the period.
Why is the term “costs” useful? It helps you calculate job costs alongside payments. To explore direct spending on a job in more detail, see the article on direct costs in construction (in Russian).
What are expenses?
In this article, expenses are amounts recognized in the financial result for a period under the adopted management accounting method. The timing of recognition depends on the substance of the transaction, the period in which the resource is used, and its relationship to completed work and the corresponding revenue, where the model provides for that relationship. A work acceptance document or acceptance of the work can support the transaction, but neither is a single recognition criterion for every situation. Within the business, expenses appear in the profit and loss statement: revenue, cost of work, operating expenses and net profit.
Company expenses beyond individual projects are an important case. In construction, they are often hidden within jobs to make the price “work” for the customer. The result is familiar: there are plenty of projects, turnover grows, profit stands still, and you have to find funding for growth case by case.
To understand the cause, give company expenses their own rules and categories. Spending on sales can be considered separately as selling expenses (in Russian). For an initial classification, ask whether the expense relates to a specific job or to the company’s sales activity as a whole. The amount of work on a job does not, by itself, determine when an expense is recognized.
How this works in construction: 6 situations
Situation 1. You paid for materials and bought them in advance for storage. The payment has taken place, while the materials are still recorded as inventory. Moving them to the site does not, by itself, prove that they have been consumed. As the materials are used, their value is included in the costs of the work; it enters the profit calculation under the established expense recognition rules, taking its relationship to completed work into account.
Situation 2. You made an advance payment to the crew. This is a payment; until the work is performed, the advance is accounted for separately from the value of resources consumed. As the work is carried out, its value is recorded in costs based on the confirmed amount of work. It becomes an expense under your model’s recognition rules. Including the advance in the profit calculation immediately may distort the project’s result.
Situation 3. A delivery charge surfaced after the event. If it relates to a specific job, you can attribute it to direct costs under the adopted method. When delivery forms part of the cost of inventory, it is accounted for with that inventory until the expense is recognized. Set the category and define in advance who records delivery and when: this reduces the risk of missing costs on the next job.
Situation 4. You bought a tool for use on several jobs. If it will be used over more than one period, this model records its purchase separately as an asset. The cost of using it is attributed to periods and projects through depreciation or another established allocation method, such as hours of use or the amount of work performed. The full purchase price does not automatically become an expense for the period. The method should reflect how the tool is used and be applied consistently.
Situation 5. The office, bookkeeping and advertising. These are company-level costs in the selected model; expenses are recorded in the periods in which the related services are consumed. Prepayments for future months are accounted for separately until the services are used. Allocating these expenses to jobs without a clear basis can distort comparisons of project profitability.
Situation 6. A project showed a profit based on direct costs, but sales and management expenses were left out of the company’s result. Once they were included, the business’s overall result was below expectations. Check whether indirect expenses are recorded separately and whether any amounts are counted twice when allocated to jobs. The source of the money used to pay those expenses does not, by itself, determine the project’s profitability.
How to keep your accounting clear: practical rules
Agree on the terminology and on where these figures are recorded. Your accounting can then help you see where a project is running over budget, where margins are falling and where a cash shortfall is developing.
Start with the rules below. The amount of implementation work depends on the data you already have, the number of projects and the procedure for confirming transactions.
- Define what counts as a payment, a cost and an expense in your management accounting model. Set out the definitions and examples, including inventory purchases, advances and tools used over an extended period.
- Keep separate records for each job. A project is a financial reporting unit: it brings together receipts, costs and documents for that job.
- Define your expense categories (in Russian) and decide who selects them when a transaction is recorded.
- Separate direct and indirect costs. Attribute direct costs to the project and record indirect costs separately; establish the basis and method of allocation in advance.
- Determine when expenses are recognized in your reports. Specify how costs relate to completed work, the relevant period and revenue, where the model provides for this. Payment, a work acceptance document, acceptance of the work or month-end closing may support the transaction; none is a universal basis for recognition in every case.
- Look at the business through three reports: the cash flow statement shows movements of money, the profit and loss statement shows profit and loss, and the balance sheet shows assets, liabilities and equity.
If you use accounting for pricing and negotiations with customers, add a comparison of estimated and actual figures to this framework. This helps you notice budget overruns before the job is handed over. For estimating, see the article on how to calculate an estimate (in Russian).
How the 101 app helps you keep things organized
In a project-based business, arithmetic is rarely the problem. The problem is collecting the actual records: receipts in chats, advances agreed verbally, deliveries without documents, and work signed off after the event. As a result, costs become difficult to track by job, while company expenses disappear among projects.
The 101 app is organized around the project: receipts, spending, categories, documents, estimated-versus-actual comparisons and job-level reports. This reduces the delay between a real transaction and the figures in your accounting, and helps you keep job costs and profitability in view.
If you would like to see how this works for your jobs, request a demonstration: we will show you how to assign direct costs to categories and separate company expenses for report analysis.
You can add more detail over time. Once recording actual transactions becomes a habit, the next step is to examine hidden expenses and the economics of sales: where to find money within your business (in Russian), and why giving sales expenses their own line can change your view of profit.
