As a business owner, you might need to engage in long-term business improvement projects from time to time, such as purchasing new equipment that needs assembly, adding a new building or enlarging a warehouse, for example. These projects could span several months, and it's important to have a way to track costs over time to prevent budget overruns.
It's also important to have a safeguard in place to prevent paying ahead of schedule for work that hasn't yet been completed. The balance sheet's capital work in progress, or CWIP, account is used to track costs for these types of projects, giving you the insight to resolve any issues before they become larger problems.
Capital work in progress, or CWIP, is an asset account on the balance sheet. It's used to record current costs related to long-term projects, such as constructing a new building. Once the project is finished, the costs are moved to a property, plant and equipment asset account.
What Is Capital Work in Progress?
This terminology is used in accounting to label costs involved in the construction of a large asset, such as a new building. While the building is under construction, it’s recorded as work in progress, or WIP, rather than as a finished asset. Once the building is complete, it will be recorded differently. For the duration of the construction project, the building costs are accumulated and recorded in a manner that helps track the progress of the project toward its completion.
The process of recording the transactions for CWIP involves using a separate account that falls under the long-term assets section of the balance sheet and is often named "construction work in progress." Construction and capital are two terms that are used interchangeably at times, although capital is a more general term that could include other types of projects, such as the acquisition of new equipment that requires assembly.
The costs related to an ongoing capital project are recorded as debits to increase the balance of the WIP asset account. The project is not subjected to any depreciation until the completed building or other asset is finished and placed into service at the business. At completion, all costs in the WIP account related to the project will be transferred into a new asset account using debit entries.
The Finished Project
At the completion of the project the company accountant transfers all of the costs from the WIP journal to a new asset account. The completed asset, such as a new building or warehouse, now shows on the company’s balance sheet as an asset under the property, plant and equipment section.
Monitoring WIP Entries
Many issues can come up with accounting for and tracking WIP costs, which is why it makes sense to keep all of the details in a separate account until project completion. For example, a construction firm may be overbilling by asking for payment when it hasn’t yet met the appropriate construction milestones. A project could be only 25 percent complete, yet 40 percent of the budget has already been used, for example.
When a construction project is in danger of running over budget, this becomes easier to spot if the company reviews its WIP account and produces some type of report for review on a regular basis, such as monthly or weekly. Other issues, such as a construction company that falls behind on its billing, could create a cash flow issue in the future if it expects payment of a large sum all at once.
Many accounting software packages have some capability to track WIP, but it can also be done in a spreadsheet. The process involves having project milestones and applying a completion percentage that gets updated throughout the life of the project. For short projects that take four weeks or less, the report may not add any value. However, larger projects such as building construction could easily take 12 months or longer, and producing a report to monitor WIP entries and comparing them against the project budget expectations can avert potential budget and cash flow disasters.