Most accounting procedures, regardless of the software used, don’t accurately reflect the true income for a business that has projects of longer duration. This is especially true for businesses that might have income spread out over several weeks, and will start and stop at certain intervals. This is why the “Work in Progress” method of accounting was created. For these types of businesses, it is crucial to reflect the true rate of progress to help business owners understand the current profitability of the project, not just the projected profitability.
Businesses that sell hardware or provide services immediately can utilize traditional accounting methods, because they do not need to reflect the progression of a project and how it impacts the bottom line over time. This is what makes the “Work in Progress” method an essential part of accounting for project-based small businesses.
Why Use Work In Progress Accounting?
Imagine you have a project that takes 6 weeks. After 3 weeks it’s probably 50% completed. If you account for your costs during the progress, and your income only when you receive the final payment, then the monthly net income will not reflect reality for two or more months.
To better reflect the reality of your business finances, and the profitability of your company, you and your management team need a clear picture of each project in progress. By properly applying an accounting system that fits your business, your management decisions can be made with real-time information. This is bound to give your business a better ability to identify problems and see profits.
Business Types Using Work In Progress
- Construction and Contracting for projects over 1 month
- Architecture, Engineering
- Repair work, such as automotive, where there is significant time in doing an estimate, getting approval (ICBC approval), ordering parts, waiting for delivery, installing parts, preparing for painting, and the painting.
The Major Stages of Construction Work In Progress
- Cost estimate which would include timeline estimate
- Revenue estimate
- Determining project milestones
- Comparison of actual costs to estimated costs to milestones completed
- Recognizing revenue
- Project completion and postmortem on estimates vs actual costs
Still Confused ?
Many professionals including builders, contractors and automotive shops are uncomfortable with accounting details. That is understandable since your business is what you do while ours is accounting. We can make it easy for you to understand your financial issues because we have worked with many small businesses like yours over the years. We speak your language. Let us help you to feel comfortable with your company finances again.