Work in progress accounting

Boomtownrat81

Hello all,
I have a question regarding the journals required for accounting for WIP in different industries;

Firstly - Accounting Firm

All employees record their time sheets on a daily basis and these hours are charged to clients on the time management system at the employees daily chargeable rate eg €50 per hour. However the employee's hourly rate of pay from the practice is €20.

At year end there are 40 hours charged to this client on the time management system equating to WIP of €2,000. Throughout the year the employees monthly salary is paid and presumably journalised as follows;
DR CR
Gross Salaries x
Paye/PRSI Control x
USC Control x
Bank x

This accounts for the employees wages and the corresponding liability to Revenue.


There is €2,000 of WIP incurred so;

DR CR
WIP (B/Sheet) x
WIP (P & L) X

This is then transferred out as billed.

Here is where I am confused - Take long term construction contract WIP;

The costs of direct labour need to be accumulated in WIP throughout the year - but you also need to account for the resulting payroll tax liabilities.

DR CR
WIP (Direct Labour) x
Payroll Taxes x
Bank (Net Wages) x

Obviously these direct labour costs are released to the P & L as the contract progresses through milestones;

How do companies keep track of the WIP on each project - is there tons of excel work involved or is there software available for this? It must also be difficult in reconciling P 35's if some wages are expensed and some still in WIP? Finally, are my accounting treatments above correct?

Many thanks in advance

whatawaster

Boomtownrat81 wrote: »

Hello all,
I have a question regarding the journals required for accounting for WIP in different industries;

Firstly - Accounting Firm

All employees record their time sheets on a daily basis and these hours are charged to clients on the time management system at the employees daily chargeable rate eg €50 per hour. However the employee's hourly rate of pay from the practice is €20.

At year end there are 40 hours charged to this client on the time management system equating to WIP of €2,000. Throughout the year the employees monthly salary is paid and presumably journalised as follows;
DR CR
Gross Salaries x
Paye/PRSI Control x
USC Control x
Bank x

This accounts for the employees wages and the corresponding liability to Revenue.


There is €2,000 of WIP incurred so;

DR CR
WIP (B/Sheet) x
WIP (P & L) X

This is then transferred out as billed.

Here is where I am confused - Take long term construction contract WIP;

The costs of direct labour need to be accumulated in WIP throughout the year - but you also need to account for the resulting payroll tax liabilities.

DR CR
WIP (Direct Labour) x
Payroll Taxes x
Bank (Net Wages) x

Obviously these direct labour costs are released to the P & L as the contract progresses through milestones;

How do companies keep track of the WIP on each project - is there tons of excel work involved or is there software available for this? It must also be difficult in reconciling P 35's if some wages are expensed and some still in WIP? Finally, are my accounting treatments above correct?

Many thanks in advance

Re: Wages - all the wage information should be on a separate payroll system so the P35, P30's etc are as straightforward as any company. The only complications come in how you decide to take this information from the payroll system and account for it on your accounts system.

Initial entries might be:
Dr WIP (Balance sheet, direct labour) - x
Dr Wages (P&L, admin labour) - x
Cr Bank (Balance sheet, net wages paid) - x
Cr PAYE control (Balance sheet, taxes due) - x

It is then a separate exercise, maybe on excel, maybe on specialised software, depending on the complexity of the contracts, to track the costs and stage of completion of the contract and release to the P&L accordingly.

Boomtownrat81

Having another think about this today and I think we are both incorrect!

The direct labour that is incurred is in effect the workers creating the WIP asset which the company will then bill out at stage payments.

I think the treatment is to expense all wages incurred to the P & L as they arise and the WIP is accumulated on project software or excel for journal entry purposes. At month end, the WIP on each project is visible and the movement in WIP journalled as;

DR CR
WIP Balance Sheet
WIP P & L

Thus you have all the wages expensed and you have your closing WIP to account for the portion of these wages that is not billable.

Would you agree with this?

whatawaster

Boomtownrat81 wrote: »

Having another think about this today and I think we are both incorrect!

The direct labour that is incurred is in effect the workers creating the WIP asset which the company will then bill out at stage payments.

I think the treatment is to expense all wages incurred to the P & L as they arise and the WIP is accumulated on project software or excel for journal entry purposes. At month end, the WIP on each project is visible and the movement in WIP journalled as;

DR CR
WIP Balance Sheet
WIP P & L

Thus you have all the wages expensed and you have your closing WIP to account for the portion of these wages that is not billable.

Would you agree with this?

It sounds more right than my answer anyway!

Both methods will, in effect, give you the same P&L charge though. I'm not sure which way is in line with GAAP. I suspect you are right though.