What is Construction In Progress Accounting: Everything You Need To Know
Accounting in the construction industry is unlike most other industries. With construction companies always on the move, there are more categories and accounts to keep track of, creating challenges that are unique to the construction industry. One of these challenges is learning how to record construction in progress accounting.
Construction in progress accounting is one of the most important categories to keep track of for construction firms, so below we’ll go over what construction in progress accounting is, how to record it, and provide an example of what it may look like in your books.
And because accurate accounting is crucial to successful construction management, we’ll give you some tips on how implementing a construction management software with accounting integration can help your business to maximize its efficiency.
Table of Contents
What is CIP Accounting
Construction in progress is an accountancy term for all the costs of construction associated with the building of fixed long-term assets. The construction in progress account has a natural debit balance, and is labeled as property, plant, and equipment as part of a company’s long-term assets on a balance sheet. 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.
Recording CIP Accounting
In addition to knowing what construction in progress accounting is, you should also know what’s involved when recording the account. 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.
Once the asset is put into service, the construction in progress account will be credited, and the debit is transferred to property, plant, and equipment. Below we’ll show you an example of what the recording may look like for a company.
Example
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.
The Benefits of Accounting Integration Software
While traditional methods of accounting in construction management may still work for some companies, implementing a construction management software with accounting integration can simplify the process, ease the stress, and make your business much more efficient. There are many perks to using software, such as automated job costing, better financial tracking, and workers in the office and field having instant access to files like timecards and change orders. Depending on the software, it can also include security and auditing features to help avoid risks. Overall, utilizing a software with accounting integration can help to improve the speed and accuracy of your reports.
Conclusion
From reading this article, you should have a much better idea of what construction in progress accounting is, and how record it in your books. It’s important to remember that there can be many different costs associated with construction in progress accounting, so your accuracy in tracking and reporting these costs is vital to keeping the project on budget. Also be sure to check out how a project management software with accounting integration can help your business prosper in both the field and office.
FAQs: What is Construction In Progress Accounting
What is Construction in Progress (CIP) Accounting?
Construction in Progress Accounting, often abbreviated as CIP Accounting, is a specific accounting method used in the construction industry to track and manage the costs associated with constructing fixed, long-term assets such as buildings. These costs are recorded in a dedicated account, “Construction in Progress,” and are later transferred to property, plant, and equipment when the construction project is completed and the asset is put into service.
Why is CIP Accounting Important for Construction Firms?
CIP Accounting is crucial for construction firms because it allows them to accurately track and report the various expenditures incurred during a construction project. Since these costs can be substantial, the CIP account is typically one of the largest fixed asset accounts on a company’s balance sheet. Additionally, proper CIP Accounting is important for financial transparency and to ensure that profits are accurately represented, especially in cases where construction projects span extended periods.
How is CIP Accounting recorded?
CIP Accounting is recorded with a natural debit balance. As construction costs accrue during the project, they are debited to the “Construction in Progress” account. When the construction project is completed, and the asset is placed into service, the CIP account is credited, and the corresponding debit is transferred to the “Property, Plant, and Equipment” account. This process reflects the asset’s transition from an unfinished state to a productive, long-term asset.
Can you provide an example of CIP Accounting in practice?
Certainly, here’s an example of how CIP Accounting might be recorded for a construction project:
- On July 18, 2019, Vendor A delivered materials to the job site with an invoice of $200,000. The entry would be:Debit: Construction in Progress $200,000 Credit: Accounts Payable $200,000
- On July 19, 2019, a transportation bill of $2,000 was received for delivering materials, leading to the following entry:Debit: Construction in Progress $2,000 Credit: Accounts Payable $2,000
- On July 26, 2019, inventory worth $1,000 was used in the construction, resulting in this entry:Debit: Construction in Progress $1,000 Credit: Inventory $1,000
- On July 30, 2019, Vendor B delivered supplies with a $60,000 invoice:Debit: Construction in Progress $60,000 Credit: Accounts Payable $60,000
- On August 15, 2019, the construction was completed, and the total costs were calculated to be $263,000. The entry was:Debit: Equipment $263,000 Credit: Construction in Progress $263,000
At this point, the company would start depreciating the equipment since the project is finished.
What are the benefits of using Accounting Integration Software in construction management?
Accounting Integration Software offers numerous advantages for construction management, such as:
- 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.
How can Construction Management Software with Accounting Integration benefit my construction business?
Using Construction Management Software with Accounting Integration 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.