What is Construction In Progress Accounting: Everything You Need To Know
Construction in progress accounting is one of the essential categories for construction firms to track. In this entry we will discuss what construction in progress accounting is, how to properly record it, and provide an example of what it may look like in your books.
Accounting in the construction industry differs from most other industries. With construction companies quickly evolving, there are more categories and accounts to consider, creating unique challenges for this industry. Among them, learning how to record construction in progress accounting stands out.
Table of Contents
What is Construction in Progress (CIP) Accounting?
Construction in progress is an accountancy term for all the costs of construction associated with building fixed long-term assets. The construction in progress account has a natural debit balance, and it is labeled as property, plant, and equipment belonging to the company’s long-term assets on a balance sheet. This means that accountants will begin tracking depreciation once the construction of the asset is complete and put into service.
To simplify it, the CIP account is just an account that records all the different expenditures 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 time the account can be open. Companies can store costs under the account for extended periods, thus avoiding depreciation, meaning that reports could have profits listed at a higher value than they may be.
Note: CIP accounting and Work in Progress (WIP) should not be used interchangeably because they do not share the same purpose. CIP accounting records the construction expenses of a long-term asset, while WIP accounting tracks short-term projects primarily.
Why are CIP Accounts Needed?
CIP accounts are crucial in construction accounting because they keep track of all the money spent on a project until final delivery. This includes material costs, labor, and other expenses. Companies can monitor spending and budgets using CIP accounts and adequately report their financial health. Using these accounts allows companies to separate project costs from everyday business expenses, minimizing mixups and making financial statements accurate and reliable.
Once a construction project is finished, the costs in the CIP account move to a fixed asset account. This step helps with financial reporting, updating how these costs are perceived and managed. Instead of being ongoing expenses, they’re now considered assets that will provide value over time. This transition is essential to meet accounting standards and allows businesses to log their investment in new constructions on their books accurately.
How to Record Entries for CIP Accounts
In addition to knowing what construction in progress accounting is, you should also know what’s specifically involved when recording the account. As 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 using construction in progress journal entries until the project finishes and the asset is in service.
Once the asset is fully executed, the construction in progress account will be credited, and the debit will be transferred to the property, plant, and equipment. Below, we’ll show you an example of what the recording may look like for a company.
Construction in Progress Journal Entry Examples
For this example, let’s say Company ABC is the contractor and just began construction on a project for a new building. Here’s what Company ABC’s journal entries might look like during the construction process:
1) On July 18, 2019, Vendor A delivered materials to the job site and issued an invoice of $200,000:
Account Title Debit Credit
Construction in progress 200,000
Accounts Payable 200,000
2) On July 19, 2019, Company ABC received a bill from the transportation company for delivering the materials priced at $2,000:
Account Title Debit Credit
Construction in progress 2,000
Accounts Payable 2,000
3) On July 26, 2019, Company ABC used some of its inventory in constructing the building. The inventory was valued at $1,000:
Account Title Debit Credit
Construction in progress 1,000
Inventory 1,000
4) On July 30, 2019, Vendor B delivered supplies to the job site and issued an invoice of $60,000:
Account Title Debit Credit
Construction in progress 60,000
Accounts Payable 60,000
5) On August 15, 2019, Company ABC finished construction on the building and put it into service. The finance department totaled the costs at:
Vendor A invoice 200,000
Transportation bill 2,000
Inventory 1,000
Vendor B invoice 60,000
Total $263,000
The journal entry would be:
Account Title Debit Credit
Equipment 263,000
Construction in progress 263,000
Company ABC would now start to depreciate the equipment since the project finished.
Why Do You Need a CIP Account Management Software like eSub?
Using construction management software with accounting integration like eSUB Cloud can make your business more efficient, reduce errors, and enhance productivity. It allows for streamlined financial management, automated processes, and better coordination between field and office teams, ultimately leading to cost savings and smoother operations.
Some of the key advantages for construction management using eSUB Cloud are:
- Automated Job Costing: Streamlining the process of tracking and allocating costs to specific jobs or projects.
- Improved Financial Tracking: Providing real-time financial insights and reports, enhancing decision-making.
- Access to Files: Facilitating access to essential documents like timecards and change orders for both office and field personnel.
- Security and Auditing Features: Enhancing data security and providing audit trails to mitigate risks.
- Efficiency: Speeding up accounting processes and improving accuracy in financial reporting.
Request a demo of eSUB Cloud and learn how we can help you build smarter, better, and faster.
