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Work in Progress Accounting FAQs |
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Q. Why is it necessary to record work in progress? Good accounting practice requires that job costs be
matched with billings on your financial statements. In
Clients & Profits, this would automatically happen if
all job costs were billed through Accounts Receivable the
same month they are incurred. In practice, agencies
sometimes bill all possible charges at the end of every
month. This results in costs on the financial statements
with no revenue yet recorded. The Work in Progress (i.e.,
WIP) report shows the unbilled amount which can be used
to accrue the revenue. Q. Why doesn't Clients & Profits make the accrual JEs for me? Clients & Profits keeps it simple. It assumes that all costs are expensed in the period they're incurred. (This isn't the same as being on a cash basis, since you're still accounting for costs and billings before they're actually paid.) It also assumes that you're generally billing costs in the same period in which you're incurring the costs -- which is more typical with today's quick-turnaround jobs. Accruing work in progress is a subjective decision based on the needs and accounting styles that are different from agency to agency. Whether you really need to track WIP in the G/L
depends on (1) the amount of unbilled costs carried over
from month to month, (2) the desire to adjust financial
statements to even out peaks and valleys in billings, and
(3) the experience and capabilities of the accounting
staff, who has to make and audit the entries themselves.
Q. What's the difference between tracking WIP by task and WIP by cost? Clients & Profits Pro and Clients & Profits Classic track WIP by task in the same way: When a client invoice is added, billing amounts are copied from the job task to the invoice. The billing amount is based on the task's unbilled total. You can bill any amount, whether it's for more or less than the job's costs. This gives you the flexibility to freely adjust your client's invoice, without worrying about the costs on the job itself. How the job task tracks WIP is simple: it is the difference between the task's gross costs minus the task's billings. When you print the WIP by Task report, you're seeing the leftover unbilled tasks -- whatever still hasn't been billed. Clients & Profits Pro tracks work in progress one step farther. It applies billing amounts directly to costs automatically when the invoice is added. This means each cost record -- each time entry, A/P line item, check, and out of pocket expense -- will show when it was billed, how much it was billed for, and the A/R number on which it was billed. Billing amounts are allocated to the oldest costs first. Also, Clients & Profits Pro lets you adjust how much of each cost is actually billed. Cost-based WIP reports literally show you which costs
are unbilled. This option gives you the most detailed
look at unbilled costs, which then become the basis for
your WIP accrual entries. However, it's more complicated
to track WIP by cost than it is by task. To keep it
accurate, you'll need to check how billings were
allocated to job costs each time you add (or change) a
job invoice. Q. How do I use the WIP reports to record unbilled amounts in the General Ledger? A journal entry is necessary to record WIP for those costs which have not been billed at the end of the month. You'll use the Unbilled Job Tickets report to plan your WIP journal entries. Select the options to include markups and include overbilled tasks; these are the correct options to show a revenue figure to accrue. Also, be sure to enter a range of status codes that only selects open jobs. Print this report after the month's costs, time, and billings have been posted, but BEFORE posting the next month's costs and billings. Here's the WIP journal entry: Add a debit JE
for Work In Process (the asset account representing
unbilled costs) and a credit JE for Income for the total
of your unbilled costs. Then reverse this entry in the
new accounting period automatically by selecting the
Auto-Reverse option. Q. How do I adjust for billings which are charged to income before the costs are invoiced? Do I credit the WIP asset account or set up a WIP liability account? There could possibly be a negative number in the
unbilled column. This means that the task has been billed
in excess of gross (marked up) costs. Using the logic
described above, the total accrued revenue will be
REDUCED by this amount. If you are using WIP to show
costs that haven't been realized, then you would
generally set up a liability account rather than show a
negative amount for the WIP asset account. If the asset
WIP account is usually a positive amount ( a debit), then
crediting a WIP asset account may be all right. If the
unbilled amount is always a negative, it's more
appropriate to set up a WIP liability account to
credit.
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