David Polzin Commercial Plumbing

Accounting for an ongoing construction

by admin on April 20, 2017

Accounting is a profession oriented around niches. If you find yourself in a situation where you have to account for something concrete, such as construction in process, there are resources that can help you. With a little research, you can learn how to account for this type of asset.

Define works in progress

Work in progress (CIP) is also known as construction in progress. This accounting term refers to the state of an asset that is acquired but has not yet been put into service. In other words, a company has bought an asset, but there are still some processes that must be carried out before the company can use the asset. These processes could be the actual construction of the article and the installation, among other possibilities. Any costs associated with the asset before being put into service are recorded in work in progress.

How to count

Work in progress is an asset account registered with other assets in the section of property, plant and equipment of the balance sheet. Unlike other assets in this section, CIP’s assets are not amortized. A company may have several items designated as CIP at a time. In order to differentiate the elements, they are assigned project identifications. To record the CIP increases, the CIP account will be debited (as you would any other asset) and will be credited to the corresponding account (cash, accounts payable, etc.). When a CIP project is completed, you must reclassify the project to another fixed asset account.

For example, if you are the accountant of a company that is currently building new machinery, the costs associated with the acquisition and construction of the machines would be debited at the CIP under the corresponding project identification.

Once the new machinery is completed, you take the total amount of that project as CIP and you credit CIP for that amount, which decreases the CIP by the amount of the project. You then debit a new asset, such as “machinery”, for the total amount of the project cost. You can then begin to depreciate this completed asset.

Industries that use CIP

Many industries use construction in process accounting. Factories use it every time new and complicated machinery is added. Real estate companies and hotels use it every time a new building is added or they do an extensive renovation of an existing one. Basically any company that has several costs associated with acquiring a new fixed asset (e.g., labor, transportation, etc.) will use CIP accounts until the asset is ready to be put into service and amortized.

More information

If you need more information about construction in process accounting, you may consider taking an intermediate accounting course online or looking for a similar course at a college or university. In addition, there are software companies that specialize in asset management companies and have programs specifically for construction in process.