Is Work in Process an Asset or Liability?
In business accounting, an asset is something that the business owns that has worth. This can be as simple as cash or as complicated as a legal contract for partial ownership. Many businesses have physical assets in the form of equipment or computers. A liability is something that the business owes, such as a loan or an interest payment that it must make. Often accounting items fall clearly into one category or another. Sometimes, however, items such as work in process are not as clear-cut.
A work in process is some type of item that is only partly completed. A construction project that has been paid for but not yet finished is a work in process. A very common use of the term is in manufacturing, when the time, materials and energy have all been invested in making a product, but the product is not yet completed and cannot yet be sold. Products in the middle of assembly lines and between stages of work fit this description.
Typically, a work in process is classified as a current asset. This is means that is owned by the business and worth something, but the business will be selling it or using it in some way to exchange its value for the more liquid value of cash. While a work in process is not quite an asset yet, it soon will be and so accountants find it easiest to count it as an asset.
Works in process are counted as assets because they already have value attributed to them -- although their own value is still nascent. However, in certain cases the company may not have yet contributed any value to the works in process. It may be funded by a source outside the company, or it may not have any materials or labor allocated yet (still in a design stage). In this case, accountants may classify works in process as something other than an asset, but this is unusual.
Typically there are three different accounts used for product creation. The first account is the work in process account, in which the value of the goods is held until they are completed. Once the goods are finished, accountants move them to the finished goods inventory, which are assets waiting to be sold. When they are sold, accountants move them finally into the cost of goods sold account.