Most companies handle inventories that are crucial in generating revenues. These inventories usually include raw materials and finished goods. However, some companies may also report these inventories in another category. Most companies term this category as work in progress. The accounting for work in progress may differ from the other types of stock. However, it is crucial to understand what it is first.
What is Work in Progress?
Work in progress is inventory that companies hold and is a part of their production process. In other words, it represents stock that is the company has not processed into finished goods yet. Usually, companies acquire raw materials from suppliers. Once they get those materials, they put them through the manufacturing process to convert them into finished goods. While in this process, the inventory is called work in progress.
Work in progress does not qualify as raw material as it has entered the production process. On the other hand, it also does not satisfy the requirements to fall under the finished goods category. Therefore, companies classify them separately to ensure proper presentation. On top of that, the cost incurred on this stock may differ from finished goods and raw materials.
What is the accounting for Work in Progress?
Work in progress is crucial in the accounting process when reporting year-end stock. Companies maintain a work in progress account that accumulates various costs when manufacturing products. Usually, the first item to enter this account is the raw materials moved from the warehouse to the factory floor. From there, companies incur labour costs and other overheads, which become a part of this account.
The items that enter the work in progress account stay on the debit side. These costs remain in the account till they get converted into finished goods. Once manufactured, companies move those costs out of the WIP account through a credit entry. Therefore, accounting for work in progress involves accumulating various items in the WIP account. Subsequently, it requires companies to move goods into the finished goods account.
What are the journal entries for Work in Progress?
The journal entries for work in progress usually involve transferring items into and out of the account. As mentioned above, the prominent cost in this account includes raw materials. Companies use the following journal entries to transfer raw materials to the work in progress account.
| Dr | Work in progress |
| Cr | Raw material |
Once the raw material gets transferred to the manufacturing process, companies incur conversion costs on the items. These costs usually include labour expenses and other manufacturing overheads. Companies record these items in the work in progress account as they pay them. Usually, they enter each item separately. Nonetheless, those items will use the following journal entries.
| Dr | Work in progress |
| Cr | Conversion costs |
Lastly, when the manufacturing process is over, companies transfer items out of the work in progress account. They send those items to the related finished goods account. The journal entries may look as follows.
| Dr | Finished goods |
| Cr | Work in progress |
Example
A company, Blue Co., acquires raw material for $10,000. The company records this purchase in the raw material account. Subsequently, Blue Co. transfers these materials to the manufacturing process. The company uses the following journal entries for this process.
| Dr | Work in progress | $10,000 |
| Cr | Raw material | $10,000 |
During the manufacturing process, Blue Co. incurs conversion as well. These conversion costs amounted to $5,000. Blue Co. uses the following journal entries to record those costs.
| Dr | Work in progress | $5,000 |
| Cr | Conversion costs | $5,000 |
Once completed, Blue Co. transfers the final product to its store. These products are ready for sale and constitute the company’s finished goods. Blue Co. uses the following journal entries to transfer work in progress to finished goods.
| Dr | Finished goods | $15,000 |
| Cr | Work in progress | $15,000 |
Conclusion
Work in progress describes inventory that is a part of the manufacturing process. Usually, it refers to costs that have not been converted into finished goods. However, these costs have already been incurred during the manufacturing process. The accounting for work in progress involves transferring items in and out of the work in progress account.
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