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Some companies take up construction projects for internal use. These may include building a fixed asset for future use. Sometimes, this work may not be complete when a company prepares its accounts. Therefore, the company must perform specific accounting treatments to present this work. The process is not complex but requires an understanding of the concept first.
What is Construction in Progress?
Construction in progress (or construction work in progress (CWIP))is an account in the balance sheet that includes costs incurred during the construction phase of long-term assets. It may consist of work on a fixed asset such as a building, factory, or power plant. Usually, construction work in progress consists of materials, labour, equipment rental, borrowing costs, and other indirect expenses.
Accounting standards require companies to show uncompleted work separately from other assets. In the balance sheet, it appears as construction work in progress. Primarily, companies use this treatment as the asset is not yet complete and is considered a work in progress. Therefore, it is not readily generating income for the company. Once the work gets completed, the company can transfer the amounts from this account to the relevant fixed asset account.
What is the accounting for Construction in Progress?
The accounting for construction in progress occurs through several accounting periods. Firstly, when a company starts construction work on an asset, it records it in a separate account. As mentioned above, these costs include material, labour, borrowing, equipment costs, etc. Over time, the amount in this account builds up until the construction work is complete.
Once the company stops working on an asset and that asset is available for use, it must remove the amount from the account. Usually, all the amount from the construction-in-progress account gets transferred to the relevant fixed asset account. From this point onwards, the accounting for the amounts falls under the applicable accounting standards.
What is the journal entry for Construction in Progress?
As mentioned above, the accounting for construction in progress includes various stages. It starts when a company begins construction work on an asset. At this point, the company must capitalize all relevant expenses pertinent to the construction to a separate account. In most cases, this account is known as the construction work-in-progress account.
The journal entry to record expenses incurred for construction work at this stage is as follows.
|Dr||Construction work in progress|
|Cr||Cash or bank or accounts payable|
Once the work on the asset under construction is complete, the company can transfer the amount to the assets account. At this stage, the journal entry is as follows.
|Cr||Construction work in progress|
A company, Blue Co., begins constructing a building for future office space. The company spends $100,000 in materials for the construction work. Similarly, the labour charges are $150,000. Other expenses related to the building amount to $50,000. Overall, the company records these amounts in the construction work-in-progress account. Blue Co. pays all these expenses through its bank account.
The collective journal entry for these is as below.
|Dr||Construction work in progress||$300,000|
After the work on the building is complete, Blue Co. transfers these costs to the relevant account. The journal entry for this transfer is as below.
|Cr||Construction work in progress||$300,000|
Construction in progress refers to costs that a company incurs for construction work on incomplete assets. Once the construction gets completed, the company transfers these costs to the relevant fixed asset account. Accounting for construction in progress occurs in two stages, as stated above.
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