Florida Contractor Business & Finance — Complete Study Guide (2026)

Introduction

This is the largest single area on the Florida Business & Finance examination — roughly one question in three. It is also the area where candidates who "run a good jobsite but never learned the books" lose the most points, and where a few hours of focused study pays off fastest, because the material is rule-based and formula-based rather than judgment-based. If you know what a current ratio measures, how to read a balance sheet, how percentage-of-completion recognizes revenue, and how to run a paycheck from gross to net, you can bank a large block of the test.

The Business & Finance exam is not asking you to be a CPA. It is asking whether a licensed contractor can keep books that tell the truth, bill and collect on time, know whether a job made money, keep enough cash to make payroll, and file and deposit payroll taxes correctly and on time. Those are the same skills that keep a contracting business solvent — the exam and real life line up almost perfectly here.

Two framing facts about Florida shape this whole section. First, Florida has no state personal income tax, so there is no state income-tax withholding line on a Florida employee's paycheck — a point the exam and the real payroll both turn on. Second, the federal payroll rules (FICA, FUTA, income-tax withholding) come straight from the IRS "Circular E," Publication 15, which every Florida employer follows identically to employers in every other state. Where a number below is federal and statutory, it is stated plainly; where a figure changes year to year or is Florida-specific, it is flagged for you to confirm against the current Circular E or Florida Department of Revenue guidance before relying on it.

Learning objectives

After working through this chapter you should be able to:

• Distinguish the cash and accrual methods of accounting, and explain percentage-of-completion versus completed-contract revenue recognition for long-term construction jobs.
• State the accounting equation and explain double-entry bookkeeping — journals, the general ledger, and how debits and credits work.
• Read the three core financial statements: the balance sheet, the income (profit-and-loss) statement, and the cash-flow statement, and know what each one tells you.
• Manage accounts receivable and accounts payable, and understand why the timing gap between them drives a contractor's cash flow.
• Set up job costing and cost codes, and compare actual versus estimated cost to find overruns while the job is still running.
• Compute and interpret the key financial ratios — current ratio, quick (acid-test) ratio, working capital — and explain cash-flow management.
• Run a break-even analysis in both units and dollars.
• Calculate straight-line depreciation of an asset.
• Calculate payroll from gross to net, apply the FICA and FUTA rates from Circular E, and identify the employer's matching and unemployment taxes and the filing and deposit deadlines.

Part A — Accounting methods and revenue recognition

Cash basis versus accrual basis

Every business must decide when it records income and expenses, and there are two answers.

Under the cash basis, you record income when cash is actually received and expenses when cash is actually paid. It is simple and it mirrors the bank account, which is why very small contractors like it. Its weakness is that it can badly misstate how a business is really doing: a contractor who has finished $80,000 of work but not yet been paid shows no income on a cash-basis book, and a contractor who collected a large deposit for work not yet done looks artificially profitable.

Under the accrual basis, you record income when it is earned (when you have done the work and have a right to bill), and expenses when they are incurred (when you receive the material or the subcontractor performs), regardless of when cash changes hands. Accrual accounting matches revenues to the expenses that produced them, so it shows a truer picture of profitability. It is the method that supports the receivable and payable balances, job costing, and the financial statements the rest of this chapter relies on. Larger contractors and most that carry inventory or bill on long jobs use the accrual basis, and lenders and bonding companies generally expect accrual-based statements.

The tested distinction: cash basis = money in / money out; accrual basis = earned / incurred. If a question describes revenue recognized when work is performed even though the customer has not paid, that is accrual.

Long-term contracts: percentage-of-completion vs. completed-contract

Construction has a special problem: a job can start in one year and finish in the next, so when do you recognize the profit? Two methods answer this, and both are tested.

Under the percentage-of-completion method, you recognize revenue and profit gradually as the job progresses, in proportion to how much of it is done. The most common measure of "how done" is the cost-to-cost ratio: percent complete = costs incurred to date ÷ total estimated costs. You then recognize that percentage of the total contract price as revenue to date. This method matches income to the work actually performed each period, so it gives the most realistic picture of a long job — and it is generally required for larger contractors for tax purposes on long-term contracts.

Under the completed-contract method, you recognize no revenue or profit until the job is finished (or substantially complete). It is simpler and it defers taxes, but it can make a busy year look empty and the closing year look enormous. Under IRC §460, large contractors are generally required to use percentage-of-completion for long-term contracts; the completed-contract method survives for two carve-outs: (1) home-construction contracts, and (2) other construction contracts of a "small contractor" — one whose average annual gross receipts for the prior three years do not exceed the §448(c) threshold (about $31 million for 2025, indexed annually for inflation) — that are expected to be completed within 2 years. So the tested idea is that completed-contract is for home builders and small contractors on short jobs, while everyone above the gross-receipts threshold must recognize profit as they go.

Source: IRC §460(e) (long-term-contract exceptions) and §448(c) (gross-receipts test, inflation-indexed — confirm the current-year figure).

Example (percentage-of-completion). A Tampa contractor signs a $500,000 contract. The total cost to build is estimated at $400,000. At year-end the contractor has incurred $200,000 in costs. Percent complete = $200,000 ÷ $400,000 = 50%. Revenue recognized to date = 50% × $500,000 = $250,000, against $200,000 of cost, for $50,000 of profit recognized this year — even though the job is not finished. Under the completed-contract method the same contractor would recognize $0 until the project wrapped.

Source: IRS Pub. 538 (Accounting Periods and Methods) and IRC §460 for long-term construction contracts; percentage-of-completion is the cost-to-cost method.

Over-billing and under-billing (the balance-sheet side of percentage-of-completion)

Recognizing revenue by cost-to-cost is only half the story. The difference between what you have earned and what you have billed produces two of the most heavily tested accounts in construction accounting — the work-in-process accounts that appear on the balance sheet:

• Costs and estimated earnings in excess of billings = UNDER-billing. You have earned more than you have billed. It is a current asset (the owner effectively owes you for earned work you have not yet invoiced).
• Billings in excess of costs and estimated earnings = OVER-billing. You have billed more than you have earned. It is a current liability (you hold the owner's money for work not yet performed).

Tie it to the Tampa job above — a $500,000 contract, $400,000 estimated cost, 50% complete, so earned-to-date revenue = $250,000:

• If the contractor has billed the owner $300,000, that is $300,000 billed − $250,000 earned = $50,000 OVER-billed → a current liability (billings in excess of costs and estimated earnings).
• If instead the contractor has billed only $210,000, that is $250,000 earned − $210,000 billed = $40,000 UNDER-billed → a current asset (costs and estimated earnings in excess of billings).

Why it matters beyond the exam: a little over-billing is normal and helps fund the job, but chronic over-billing — "front-loading" the schedule of values so early line items are billed at inflated percentages — means the company is effectively borrowing cash from future work. When the front-loaded jobs run out, the cash disappears. It is a classic red flag that bonding companies watch, because it can hide a business that is one slow month from a liquidity crisis.

Part B — The accounting equation and double-entry bookkeeping

The accounting equation

Everything in double-entry bookkeeping rests on one identity that must always balance:

Assets = Liabilities + Owner's Equity

• Assets are what the business owns or is owed — cash, accounts receivable, equipment, trucks, inventory, retainage held by owners.
• Liabilities are what it owes — accounts payable, loans, accrued payroll, taxes payable.
• Owner's equity (also called net worth or capital) is what would be left for the owner if every asset were sold and every debt paid. Rearranged: Owner's Equity = Assets − Liabilities.

This equation is the balance sheet, and it is one of the most reliable exam facts in the whole section. If assets total $600,000 and liabilities total $250,000, owner's equity must be $350,000.

Double-entry: debits and credits

Double-entry bookkeeping means every transaction touches at least two accounts, and the entries always keep the equation in balance. Each entry has a debit (left side) and a credit (right side), and for every transaction total debits must equal total credits.

The direction depends on the account type:

• Assets increase with a debit, decrease with a credit.
• Liabilities and owner's equity increase with a credit, decrease with a debit.
• Expenses increase with a debit; revenue increases with a credit.

Transactions are first written into journals (the chronological "books of original entry" — a running diary of every transaction), then posted to the general ledger, which sorts them by account so you can see the balance of cash, receivables, payables, and so on. A trial balance lists every ledger account to confirm total debits equal total credits before statements are prepared.

Example (double entry). A Jacksonville contractor buys a $3,000 compressor and pays cash. Two accounts move: Equipment (an asset) is debited $3,000 (the business owns more equipment) and Cash (an asset) is credited $3,000 (the business holds less cash). Assets simply shifted form; the equation still balances. Now suppose instead the contractor buys the compressor on account (on credit): Equipment is debited $3,000 and Accounts Payable (a liability) is credited $3,000 — assets and liabilities both rose by $3,000, and the equation still balances.

The tested trap. "Debit" does not mean "decrease" and "credit" does not mean "increase." A debit increases an asset but decreases a liability. Learn it by account type, not by a vague good/bad feeling.

Part C — The three financial statements

A contractor's books produce three statements, and the exam expects you to know what each one shows and the moment in time it covers.

The balance sheet

The balance sheet is a snapshot at a single point in time (for example, "as of December 31"). It lists assets, liabilities, and owner's equity, and it must obey the accounting equation. It answers "What is the business worth, and what does it owe, right now?" Assets and liabilities are split into current (convertible to cash or due within one year — cash, receivables, accounts payable, the current portion of loans) and long-term / fixed (equipment, vehicles, real estate, long-term debt). That current-versus-long-term split is what makes the liquidity ratios in Part F possible.

The income (profit-and-loss) statement

The income statement, also called the profit-and-loss (P&L) statement, covers a period of time (a month, quarter, or year), not a single date. It reports Revenue − Expenses = Net Profit (or Net Loss). In construction it usually runs: Revenue − Cost of goods sold / job costs = Gross profit, then Gross profit − Overhead (general & administrative) = Net profit. It answers "Did the business make money over this period?"

The cash-flow statement

The cash-flow statement also covers a period, and it tracks the actual movement of cash in and out — from operating, investing, and financing activities. It exists because a profitable company can still run out of cash: profit on an accrual income statement includes money you have earned but not yet collected, while the cash-flow statement shows what actually hit the bank. For a contractor waiting 30–60 days to collect on completed work while paying crews weekly, this is the statement that predicts whether payroll clears.

The tested distinction: the balance sheet is a point in time; the income statement and cash-flow statement cover a span of time. Profit (income statement) is not the same as cash (cash-flow statement).

Example. A Fort Lauderdale contractor's year-end balance sheet shows $600,000 assets, $250,000 liabilities, and therefore $350,000 owner's equity. Its income statement for that year shows $1,200,000 revenue and $1,110,000 expenses, for $90,000 net profit. But its cash-flow statement shows cash fell $15,000 during the year — because $105,000 of that "profit" is still sitting in accounts receivable, unpaid. Profitable on paper, tight on cash: three statements, three different truths.