Construction-in-Progress Accounting: What Business Owners Need to Know
Construction-in-progress (CIP) accounting is the process accountants use to keep track of the costs that relate to fixed-asset construction. Because construction projects necessitate a wide range of costs, CIP accounts keep construction assets separate from the rest of a company’s balance sheet until the project is complete.
The construction process involves distinctive, complex accounting protocols. Given this, it can be difficult for construction companies to manage a balance sheet on their own. Read ahead to learn more about construction-work-in-progress accounting and how our team can help you manage your construction costs.
What Is Construction-in-Progress Accounting?
Construction work-in-progress accounting refers to the record-keeping of all expenditures that accrue in constructing a non-current asset. An accountant will report spending related to the construction-in-progress account in the “property, plant, and equipment” asset section of the company’s balance sheet.
A construction work-in-progress asset is any asset that is not currently usable, such as assets that are undergoing testing or that a company is building. Depending on the project’s size, construction work-in-progress accounts can be some of the largest fixed asset accounts in a business’s books.
A construction-in-progress asset account records any costs associated with the project, including tools, transportation, labor-related to getting an asset ready for use, and materials. This expense information will help the accountant analyze if the project is being completed on budget and on plan. In addition, it will help keep the company’s books and records up to date and accurate for future audits. Once the project is complete, the CIP asset account will shift over to the appropriate property, plant, and equipment fixed-asset account that coincides with the construction’s purpose.
Accountants do not begin tracking depreciation of construction-in-progress assets until the addition is complete and in service. As a result, the construction-work-in-progress account is an asset account that does not depreciate.
Why is Construction-in-Progress Accounting Necessary?
Businesses need to prepare accurate, up-to-date financial reports that account for their expenses and profits. A balance sheet shows a company’s net worth at any given time and includes all of its assets, even those that are not currently in use.
Construction work-in-progress assets are unique in that they can take months or years to complete, and during the construction process, they are not usable. If a company does not track these costs accurately, its finance department may wonder why the company is generating expenses that do not immediately produce profits.
Auditors often target construction-work-in-progress accounts because some companies store costs in these accounts longer than they should. Because incomplete assets do not depreciate, a company may keep a work-in-progress account open for an extended time and misrepresent its profits.
Construction-work-in-progress accounts can be challenging to manage without proper training and experience. Most companies hire a chief financial officer to maintain these records and avoid costly accounting errors.
Construction Work-in-Progress Accounting Process
When you hire an accountant or CFO to complete construction-in-progress accounting for your business, the accountant will follow this process of recording and maintaining all associated expenses:
- Open a construction-work-in-progress account under the property, plant, and equipment section of the company’s balance sheet. If the company has multiple CIPs, the accountant will categorize each project separately.
- Track every cost, including materials, tools, labor, transportation, and extraneous costs, Accountants may accumulate construction costs from vendor invoices, the company’s inventory sheet, a materials transportation company, or other sources.
- Once construction is complete, shift the CIP account to the appropriate fixed-asset account. The asset will begin depreciating at this time.
Large-scale construction jobs can take years to complete and often require hundreds of separate expenses. Hiring an experienced accounting team is the best way to ensure that your company maintains accurate, detailed, and up-to-date accounting books through every step of the construction process.
Example of Construction-in-Progress Journal Entries
Here is an example to help you visualize what construction-in-progress may look like in your accounting books.
Business A is planning an office building expansion to create more workspace for its employees. Business A’s accountant will begin a Construction-in-Progress Office Expansion asset account to record expense statements for the construction job. They will then create a journal entry for every construction cost. Journal entries may look something like this:
1) On March 11, 2021, Business A received a $100,000 bill from Builder’s Warehouse for construction materials.
- Debit-Construction In Progress $100,000
- Credit-Accounts Payable $100,000
2) On March 22, 2021, Business A used some of its own materials valued at $2,000 to construct the expansion.
Account Title Debit Credit
- Debit-Construction In Progress $2,000
- Credit-Inventory $2,000
Once the expansion is complete the accountant would reclassify the CIP account to the “equipment” account with the following journal entry:
- Debit-Equipment $102,000
- Credit-Construction In Progress $102,000
Because the expansion is complete and in service, the equipment in this example will begin depreciating as other fixed asset accounts do.
Contact CFO Strategies Today
If your company is planning an expansion or large-scale construction job or just needs help with construction accounting, you need an experienced CFO team on your side to keep a detailed account of your finances. Our knowledgeable team has decades of experience managing construction company accounts, and you can feel confident that we will navigate your company’s specific situation with care and expertise.