The first step to recording CIP charges is to open a work-in-progress account under the Property, Plant and Equipment category on the balance sheet. Next, every cost associated with construction is recorded and tracked, such as materials, tools, labor and transportation. These costs are derived from vendor invoices, inventory sheets and other appropriate sources. Every journal entry made should include the date the invoice was issued, the name of the company that issued the invoice, and the dollar amount.
The debit construction in progress amount is then recorded, as well as the credit accounts payable. When construction on the project completes, and the asset is placed in service, the CIP account is shifted to related fixed-asset accounts. Once placed into the appropriate account, the asset begins to depreciate. Therefore the dollar value associated with CIP reflects the total amount of money expended for all the projects under construction combined.
The next section will elaborate on this in more detail. Now we get into the nitty-gritty stuff. The CIP account in the current assets section reflects the combined total of all expenditures related to existing projects.
The value on that line of current assets reflects the combined total of all six projects. In detail it will look like this:. So if you have several divisions of construction such as:. Then you would really gain advantage by rearranging the projects into their respective classes of construction. All three presentation formats are acceptable. I prefer the more detailed format especially if you run three or more classes of construction. If you only have only one class of construction, then use the first presentation format I illustrate above.
You can clearly ascertain the amounts invested into each one of the projects that are ongoing. This is essential in understanding where your funds are utilized. But this raises a question. Does the completed contract method or the percentage of completion method affect this dollar value? The answer is yes sir it does. Therefore, the completed contract method reflects the total accumulated costs for all projects that are currently under construction.
However, with the percentage of completion method the results are different. The zero usually occurs at the end of the accounting cycle and definitely at the end of the project. Remember, the balance sheet reflects a snapshot of a moment in time.
If the balance sheet is dated for the last day of the accounting period and the accountant has transferred all the costs associated with the project to the profit and loss statement, then the value for the respective project will be zero on that day.
The day before, the balance will be high for that project and reflects all the costs incurred through that moment in time that HAVE NOT been transferred to the profit and loss statement.
With a traditional spreadsheet presentation it would look something like this:. In percentage of completion method, some elements of the project have little to no progress made but have incurred costs such as materials are on the job site. In these situations, the evaluator keeps the percentage for that function at zero and at the same time does not transfer the costs to the profit and loss statement. So it is possible to have some costs remain on the balance sheet associated with a project that is managed for accounting purposes under the percentage of completion method.
I illustrated this above with the ending balances at the end of periods one and two with some balances. As an example:. Using the costs illustrated above, assume this is a bathroom remodeling job.
Around the 20 th of the month, the tile for the tub is delivered and is set in the garage because there is no room for it in the bathroom. However, the contractor has paid for the tile and its cost is accumulated onto the balance sheet.
Again, the contractor does not assign any percentage of completion to this step in the contract and therefore does not transfer any costs of installing the vanity to the profit and loss statement. Therefore, when looking at the CIP accounts on the balance sheet in detailed format, the project may have a balance in its account. Most often they do not; but this is strictly a determination made by management in evaluating their monthly progress for projects.
As of now, you should have a clear understanding of how Construction in Process accounts are presented and formatted on the balance sheet. In addition, based on the accounting method used completed or percentage of completion you can understand why the associated balance exists. Now I need to explain to you how to review and interpret the information. For any contractor, it is critical to understand where you are in the overall scheme of progress related to your respective projects.
Conceptualize each project as two primary financial components. Every project will have the core costs associated with construction materials, labor, subcontractors and other direct costs and margin.
The margin includes money to cover indirect costs of construction such as management salaries, transportation, insurance, and other payroll costs such as benefits and retirement contributions. In addition, the margin will also include money to cover the overhead costs front office operations and finally the best part, PROFIT for the contractor.
Well to evaluate this, we would need to estimate the percentage of completion to date. However, none of the trades have started nor are there windows or exterior doors etc. OK, now we have something to work with. I can live with that and feel comfortable the project is earning money for the company. But this is the more common outcome. Frequently, the bills received reflect materials delivered to the job site. Often materials show up well before they are needed.
In the case presented in the prior paragraph the project manager explains that the house is still being framed, but my materials reflect all of the framing materials delivered and a couple of pallets of shingles too. In my head, I adjust the costs downward to reflect the costs for shingles, plywood and the trusses. In addition I subtract costs for the two pallets of shingles, felt paper, vents, roofing nails, etc. So now I can tell that we indeed are generating margin from this project as the actual costs in my calculation correspond to the actual progress made.
By the way, this mirrors the percentage of completion method of accounting in construction. You should do this for each project in the detail format of CIP. This will provide a lot of comfort in understanding where you are in the overall scheme of earning money for the company.
When a bill is received, it should be stamped with a progress stamp identifying the project id number, the phase of construction, dates and initials of the project manager that indeed he ordered this material and approves of the corresponding costs. From here the accountant books the entry to the accounting records. The accountant debits the corresponding CIP account assigned to this project and credits the Supplier Payables account down in current liabilities.
If you are not familiar with the presentation format of current liabilities, please read Current Liabilities Section of the Balance Sheet for a comprehensive understanding.
What this means is that materials are on the job site, but we have not paid for them yet! Construction in progress is an accountancy term for all the costs of construction associated with the building of fixed long-term assets. Accountants will begin tracking depreciation once construction of the asset is complete and is put into service.
The cip account is basically just an account for recording all the different expenditures that will occur during a construction project. Because of this, it can be one of the largest fixed asset accounts in the books. Construction in progress accounting is also a prime target for auditors due to the length of time the account can be left open. Because companies can store costs under the account for extended periods of time, they can avoid depreciation, therefore reports could have profits listed at a higher value than they really are.
Like previously stated, the construction in progress account has a natural debit balance. All the construction costs associated with building the asset will accumulate under the account until the project is completed and the asset is in service.
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