QuickBooks is a popular accounting tool for small businesses, and it can be used while maintaining compliance with FAR and DCAA for government contracts. However, you do have to ensure that you’re utilizing QuickBooks properly if you want to maintain that compliance. Keep reading to get a few important tips about QuickBooks accounting if you’re a government contractor.
Compare Chart of Accounts with GAAP
In order to remain in good standing as a government contractor, your accounting system must have a chart of accounts that follows Generally Accepted Accounting Principles (GAAP). Primarily, you must be able to easily distinguish cost pools. Your indirect cost accounts need to be broken down into pools for overhead, fringe, and G&A expenses. Your general ledger should also include accounts such as payables and receivables, as well as unearned revenue and prepaid expenses to show that you’re operating on an accruals basis.
Your chart of accounts is a list of general ledger accounts and posted transactions. When using QuickBooks, you should divide direct and indirect costs through a chart of accounts sequencing. This is something you will have to configure within your QuickBooks software, and not a default setting in the program.
Ensure DCAA-Compliant Timekeeping
For government contracts, your labor costs must be calculated using timesheets, so you’ll need to set up a timekeeping system that allows all payroll employees to record their labor hours. In QuickBooks, you can set this up under “Company Preferences,” which will make the necessary reports available for you. Under “Company Settings,” you can make specific changes related to your company’s work schedule, such as setting the first day of the workweek so that it coincides with your weekly timesheets; this will help ensure payroll periods and timesheet periods match up properly, and will simplify your reporting and accounting.
Run Reports for Labor Distribution and Fund Tracking
While configuring QuickBooks, it’s essential that you fairly allocate your labor distribution to the total time recorded on your timesheets so that no single contract is given preferential treatment. You can set up your QuickBooks with employee data and compensation details, including payroll items for different types of labor, as well as PTO and holidays.
Establish separate cost categories and map them out to relevant accounts so that indirect rates can be correctly calculated. Direct labor for company sites must be listed separately from direct labor for company sites, and overhead for company sites must be separated from overhead for government sites.
Additionally, note that your actual labor distribution calculation won’t be calculated directly in QuickBooks. However, it is easy to record this outside the software to ensure accurate reporting.
Create Monthly Accruals for Revenue, Labor, and PTO
QuickBooks is programmed to allocate costs on a cash basis, which means labor is allocated to the month in which payroll is paid. So, you’ll need to prepare your accruals on a monthly basis to circumvent this default. In terms of PTO expenses, the amount appearing on your P&L in QuickBooks reflects the number of hours used rather than the hours accrued, so PTO accruals must be put together monthly to show the sum of each employee’s total accrued hours multiplied by their hourly rate.
Additionally, you’ll need to adjust each month based on your company’s internal revenue recognition procedures, as QuickBooks recognizes revenue based on the date entered on the invoice.
Track Jobs through the Customer Center
The Federal Acquisitions Regulations (FAR) specifies that contractors’ accounting systems must identify and accumulate direct costs for each contract separately. You can set QuickBooks to track customer jobs, tasks and subtasks at differing levels via the Customer Center. Here, you can specify the type of contract (firm fixed price, cost plus fixed fee, time and material, etc.) and set up several different jobs under a single customer. This makes it much simpler to maintain separate accounting for each government contract you’re working on, regardless of whether or not it’s for the same customer, so you can maintain FAR compliance.
Use “Enter Bills” Instead of “Write Checks”
Many contractors opt to use the “Write Checks” function in QuickBooks to pay bills, as it seems like the faster choice. However, this function can interfere with the requirement to report on an accrual basis. The “Write Check” function allocates expenses to the month in which the check was written instead of the month in which the expenses need to be allocated for accrual-based accounting. Stick to the “Enter Bills” function instead to maintain compliant accounting.
If you’re a government contractor, maintaining compliance while using QuickBooks can be tricky. Contact us at Peter Witts CPA to get professional guidance and support in FAR- and DCAA-compliant accounting.