Bookkeeping for contractors is not only to comply with the IRS. Done well, it is your control panel: it tells you if you are doing well, where the money goes and what to decide this month.
This guide explains what bookkeeping is, the 3 reports you should read and a simple monthly routine.
In short
- Bookkeeping means recording and organizing every dollar your business earns and spends.
- The 3 basic reports are: profit and loss (P&L) statement, balance sheet and cash flow.
- A 6-step monthly close leaves your numbers ready before the 15th.
- With your books up to date, you can quote better, control expenses and get ready for slow months.
- The bookkeeper keeps the books; the tax preparer files the returns.
What bookkeeping is for contractors and how it differs from taxes
The bookkeeper records your money moves: sales, purchases, payments and collections. This is sometimes called bookkeeping for contractors, but it is only the first part of the job: putting the numbers in order.
The tax preparer, CPA or enrolled agent prepares and files your tax returns. They are different jobs that support each other.
If your books are organized, your preparer works with clear information. It is also easier to defend your expenses if the IRS asks for proof.
The IRS says that, in general, you should keep your records for 3 years, and payroll records for 4 years. You can see it in the IRS recordkeeping guide.
And IRS Publication 583 explains which records to keep when you start a business.
The 3 reports you should look at every month
Many contractors look only at the bank balance. It is useful, but it misleads: a bank account with money does not mean you made a profit, and a low balance does not mean you lost.
You do not need to be a numbers expert. Each report answers one question, and the 3 together give you the full picture.
1. Profit and loss (P&L) statement
It answers: did I make or lose money this month? It shows sales, costs and expenses for a period.
Picture March for a remodeling contractor:
| Item (March) | Amount |
|---|---|
| Sales | $62,000 |
| Job costs (materials, labor, subcontractors) | $44,000 |
| Gross profit | $18,000 |
| Fixed expenses (insurance, truck, office, bookkeeper and tax preparer) | $9,500 |
| Net profit | $8,500 |
Gross profit is what is left after paying for the job. Net profit is what is left after you also pay for the business.
Compare each month with the one before. If your sales go up but your net profit goes down, something is eating your margin: materials, overtime or expenses nobody checks.
2. Balance sheet
It answers: what do I own and what do I owe? It is a snapshot of the business on one day.
| What you own | Amount | What you owe | Amount |
|---|---|---|---|
| Bank | $18,000 | Credit cards | $6,000 |
| Accounts receivable | $35,000 | Truck loan | $22,000 |
| Equipment and truck | $45,000 | Taxes payable | $4,000 |
| Total | $98,000 | Total | $32,000 |
The difference between what you own and what you owe is what your share as an owner is worth. In this example, $98,000 minus $32,000 is $66,000.
Look at accounts receivable: $35,000 is money you already earned, but it is not in your bank yet.
Also look at how much you owe on cards and loans. If that debt grows every month and your profit does not, slow down and review before buying more equipment.
3. Cash flow
It answers: where did the cash come from and where did it go? You can earn $8,500 in the month and still have less money in the bank.
It happens when a client has not paid you or when you bought equipment. Look at the same month of March:
| Cash flow (March) | Amount |
|---|---|
| Net profit for the month | $8,500 |
| Clients who have not paid you yet | -$6,000 |
| Tool and equipment purchases | -$4,500 |
| Change at your bank | -$2,000 |
You made money, and your bank balance still dropped $2,000. Without this report, that surprise hits when you can no longer cover payroll.
In construction this happens a lot because of progress payments and retainage. You finish work and buy material today, but the customer pays you weeks later.
That is why cash flow tells you how much cash you need on hand. With it you can ask for a reasonable deposit, collect on time or space out your purchases.
To figure out the profit on each job, read our guide to profitability for contractors. Here we only look at the whole business.
4 decisions you can make with your books
1. Which jobs make the most money. Say kitchens leave you 14% and bathrooms 5%: now you know what to sell more of.
2. Where the waste is. Gas costs, lost tools or leftover material on every job.
3. How to get ready for slow months. If sales drop every winter, you can set money aside in the summer.
4. How to bid and negotiate with data. You know your real cost, so you don't lower your price blindly.
Before you bid a new job, look at your latest profit and loss (P&L) statement. If your job costs went up, your price should go up too. With data, that talk with the client is easier.
No report decides for you, but it takes the guesswork away. To get organized, you can also see our bookkeeping for contractors service.
6-step monthly close routine
The monthly close means repeating the same steps every month, on the same dates. With this routine, your numbers are ready before the 15th.
| Step | What Latino contractors do differently when they go from doing the work to running the business: formalize, know their numbers and delegate. | When |
|---|---|---|
| 1 | Download bank and credit card statements | Days 1–3 |
| 2 | Categorize every transaction and assign it to its job | Days 3–7 |
| 3 | Reconcile bank and cards | Days 7–9 |
| 4 | Review accounts receivable and pending retainage | Day 10 |
| 5 | Generate the 3 reports | Days 10–12 |
| 6 | 30-minute meeting to decide | Before the 15th |
Reconciliation (step 3) is the one most people skip, and it is the most important. If the bank says one thing and your books say another, every report comes out wrong.
In the step 6 meeting, review only 3 things: how much you earned, how much you are owed and how much cash you need next month. At the end, write down one decision and who will do it.
If you fall short one month, do not leave it for later. One late month becomes two, and then it costs more to sort out.
If you want to know whether the person who keeps your books is doing a good job, check the 10 questions to evaluate your bookkeeper.
Quick glossary
- Bank reconciliation: comparing your records with the statement to confirm everything matches.
- Accounts receivable: what your customers owe you.
- Retainage: part of the payment the customer holds until you finish the job.
- Progress payment: a partial payment based on how much work you have done on the job.
- Job costing: cost per job; how much each job cost and how much it left you.
What to do now
- Pick one fixed day each month for your close.
- Ask for or create your 3 reports from last month.
- Write down one decision you can make with them.
- If you have questions about taxes, read our guide to taxes for contractors in California and talk to your preparer.
FAQ
Can I do my own bookkeeping?
Yes, if you have few transactions and time each week. When you have employees, several jobs at once or retainage, professional help is a good idea so you do not fall behind. If you have gone more than two months without sorting your accounts, it is also a good time to ask for help and get your numbers up to date again.
What is a bank reconciliation?
It means comparing your records with the bank statement to confirm that every transaction is recorded and that there are no errors or unknown charges. You do it every month, for the bank and the cards, before you run your reports.
What software do contractors use?
Many contractors use QuickBooks Online or other systems with a job costing feature. What matters is that you can split income and expenses by job, that your bookkeeper can review it with you, and that you can see your own reports every month.
When to talk to a professional
This article is a general guide. If your case involves a letter from the IRS, the FTB or the EDD, a lawsuit, an accident or a change in your business structure, talk to a lawyer, a tax preparer (CPA or enrolled agent) or the official agency. Every case is different.
How ODC helps you
At Oficina del Contratista we keep your bookkeeping up to date: we record your income and expenses, reconcile your accounts and explain your reports in Spanish. For taxes, payroll, insurance or legal matters, we connect you with independent partners; they provide those services, not ODC. See all services.
Want your 3 reports ready every month? Message us on WhatsApp.
References
- IRS – Recordkeeping — How long to keep records (3 years; 4 years for payroll)
- IRS – Publication 334 — Tax guide for small businesses
- IRS – Publication 583, Starting a Business and Keeping Records — What records to keep when you start a business
- SBA – Plan your business — Planning and managing your business finances
Runs Oficina del Contratista, a Spanish-language bookkeeping service for contractors. Has experience in management, sales and construction consulting.
Important notice: this article is educational and informational only; it is not legal or tax advice. It may contain errors or be out of date. Before making decisions, check it with a licensed expert or attorney.
