Why Contractor Books Go Wrong: Deposits, Materials and Owner Draws

Updated 2026-10

How to use this page

Each error below has a symptom you can see in your own reports without any accounting knowledge. If you recognise two or more, the books are not telling you the truth about the business, whether or not they balance. None of these errors is unusual. Most contractor files that arrive for cleanup have at least four.

1. Deposits booked as income

Symptom: months with big deposits look wildly profitable; the months the work is done look like losses; December is either a triumph or a disaster depending on when the last deposit landed. The fix is a customer deposit liability account, with deposits released to revenue as jobs are earned. The tax preparer sometimes catches this, usually when a year looks implausibly good.

2. Materials in overhead instead of on the job

Symptom: the job cost report shows labour and subs but materials are thin or missing, and overhead is enormous. Supply-house runs were coded to "materials expense" with no job. Every job looks more profitable than it was and the company’s overhead looks out of control. The preparer will not catch this; the total is the same. It costs money every time a job is bid off the report.

3. Owner draws as expenses

Symptom: profit is low or negative while the owner is clearly living on the business; there are expense lines like "owner", "misc" or the owner’s name. Draws are equity transactions, not costs. Booked as expenses they understate profit, which can be a tax problem in either direction and makes any lender’s read of the P&L wrong. Most preparers catch the obvious ones and miss the ones hidden in meals, fuel and supplies.

4. Loan payments booked entirely as expense

Symptom: the truck or equipment loan balance on the balance sheet has not moved in a year, and "loan payment" or "truck payment" appears as an expense. Each payment is part principal, which reduces the liability, and part interest, which is the expense. Booked as all expense, profit is understated and the balance sheet is wrong by the cumulative principal. Preparers usually catch this at year-end and fix it with a single adjustment, which means the monthly reports were wrong all year.

5. Retainage lost in receivables

Symptom: receivables look large and old; some customers appear to be ninety days late when they are not. Retainage withheld under contract is not late; it is held. Carried in ordinary receivables it makes the company look uncollectible and hides the amount actually available to collect. Carry it separately, by job. Preparers rarely care; lenders and sureties do.

6. Undeposited funds never cleared

Symptom: the bank will not reconcile; the "undeposited funds" account has a large balance; invoices show as paid that the bank has not received, or deposits appear twice. QuickBooks parks customer payments in undeposited funds until a deposit is recorded, and if payments are also pulled in from the bank feed the income is doubled. This one is purely mechanical and it breaks every other report, because nothing downstream of an unreconciled bank account can be trusted.

7. Subs paid with no W-9 and no certificate of insurance

Symptom: January arrives and nobody can produce 1099s, or the workers’ comp audit arrives and the carrier charges premium on every sub payment. Neither is a bookkeeping entry; both are bookkeeping tasks. A W-9 before the first payment and a certificate on file are ten minutes each and save a great deal of money and several unpleasant letters.

Which ones matter most

Six breaks everything and is fixed first. One and two are the ones that cost money every month by making jobs look better than they are. Three and four are the ones the preparer fixes in a single year-end adjustment, which means the monthly reports were wrong all year. Five matters when a bank or surety is looking. Seven is the one that generates penalties. A cleanup addresses all of them, in roughly that order.

Where to go next

• Cleanup and catch-up
• Progress billing, retainage and deposits
• QuickBooks for contractors: setup that lasts