Generally accepted accounting principles prescribe the use of the percentage-of-completion method of accounting for long-term construction and

manufacturing contracts except when fairly accurate estimates cannot be made to project the percentage of completion of the job (see ARB No. 45 and SOP 81-1). Then the completed-contract method of accounting is the preferred method of accounting for long-term contracts. When the percentage-ofcompletion is the method of accounting, the accounting principle of full disclosure requires the presentation of a work-in-process schedule in a company's financial statements. This schedule discloses the details of each contract stage of completion and profitability to date as well as in the current period of reporting. Its format varies, but at a minimum should include at least three components: 1. Contract Values
o o o

Job name and/or number Contract amount, including change orders Estimated gross profit Earned revenues Cost of revenues Gross profit Estimated costs to complete Billings

2. Actual Accumulated Contract Totals

o o o o o

Billings to date

Under billings Over billings

3. Totals for the Current Year o Earned revenues

o o o

Cost of revenues Gross profit Percent complete on the job

Through 12/31/09 For the Year 12/31/09 Estimated Gross Cost to Billed to Under Over Revenues Cost of Gross Percent Profit Complete 500,000 300,000 Date Billed Billed Earned Revenues Profit Complete 1,200,000 900,000 300,000 900,000 720,000 180,000 83% 80% 83% 50% 1,800,00 200,000 0

Contract Values Contract Estimated Revenues Cost of Gross Job Value Earned Revenues Profit 2,400,00 2,000,00 1,500,00 A 600,000 0 0 0 1,250,00 1,000,00 B 250,000 800,000 0 0 1,500,00 1,250,00 C 375,000 937,500 0 0 3,000,00 1,500,00 1,275,00 D 450,000 0 0 0 8,150,00 5,750,00 4,512,50 1,675,000 0 0 0

200,000 200,000 900,000100,000 312,500 187,500 1,275,00 0 1,237,50 1,962,50 0 0 225,000

1,325,00 75,000 1,250,000 937,500 312,500 0 1,450,00 50,00 935,00 1,100,000 165,000 0 0 0 5,475,00 350,00075,000 4,450,000 3,492,500 957,500 0

Often included in the above schedule are several columns showing earned revenues, cost of revenues and gross profit for the prior year. In addition, the addition of a column showing total estimated costs of each job assists the reader of the report in his understanding of the derivation of the estimated values, particularly if the company is employing the cost-to-cost method, wherein the estimate of completion is derived by the ration of costs incurred to date divided by the total estimated contract costs: Percent Complete = Cost of Revenues To Date / Total Estimated Contract Cost For example, job's B total estimated costs are $1,000,000. Its percentage of completion = 800,000/1,000,000 or 80%. The preparation of the schedule involves several: first, calculate the percentage of work completed for each job (if employing the cost-to-cost method, use the formula immediately above); secondly, apply that percentage to the contract amount to determine earned revenues and gross profit per job; thirdly, calculate any over or under billing for each job. To derive earned revenues and gross profit per job, multiply each contract amount by the percentage completed computed in step one and then subtract total costs to date from the calculated earned revenues: Contract Amount X Percent Complete = Total Earned Revenues Total Earned Revenues - Total Cost of Revenues = Gross Profit Job B's total earned revenues = 1,250,000 X 80% or 1,000,000, and its gross profit = 1,000,000 - 800,000, or 200,000.

Finally to determine the overbilling and under billing amounts, subtract billings to date from earned revenues for each contract: Total Earned Revenues - Total Billings To Date = Under(Over) Billing As one can see from the formula, if earned revenues exceed billings, the difference will be positive and reflect an under billing; a negative value indicates an over billing. Job B's over billing = 1,000,000 - 900,000, or 100,000, a positive difference. The final component of the WIP schedule, the contract results for the current year, can simply be obtained by subtracting the prior year's totals for earned revenues, cost of revenues, and gross profit, from those total values through the end of the current period. Consequently, it is desirable to include the prior year's results in the current year's WIP schedule for the benefit of the reader. Three additional columns, sometimes found at the end of the schedule, summarize the "backlog" of unfinished work remaining on each contract: that is, unearned revenues and gross profit as well as costs on those revenues not yet incurred are listed. Bonding agents and financial readers appreciate this additional information in particular because it conveniently presents the total backlog of committed work on hand at the construction company, assisting them in their estimates of potential revenues, costs, and gross profits for the contractor in the immediate future. Backlog can be derived simply by subtracting total accumulated revenues, costs, and gross profit to-date (i.e., "Through 12/31/09") for each contract from the corresponding contract totals under "Contract Values". Below is a WIP schedule including three additional columns for the prior year's results, three columns

showing the current backlog, and a column for the total estimated cost of the entire contract:
Contract Values
Total Job Contract Estimated Value Cost Estimated Gross Profit Revenues Cost of Earned Revenues Gross Profit

Through 12/31/09
Estimated

Through 12/31/08
Gross Profit

As of 12/31/09
Under Billed Over Billed -

For the Year 12/31/09

Revenues Cost of Earned Revenues Gross Profit

Backlog as of 12/31/09
Gross Profit 50,000 62,500

Cost to Billed to Revenues Cost of Complete Date Earned Revenues 300,000 1,800,000 800,000 200,000 900,000 100,000 187,500 1,325,000 600,000 80,000 -

Percent Revenues Cost of Complete Earned Revenues 83% 80% 83% 50% 400,000 250,000 250,000 200,000 187,500

120 2,400,000 1,800,000 600,000 2,000,000 1,500,000 500,000 123 1,250,000 1,000,000 250,000 1,000,000 800,000 200,000 124 1,500,000 1,125,000 375,000 1,250,000 937,500 312,500

200,000 200,000 20,000 100,000 60,000 50,000 280,000 350,000

1,200,000 900,000 300,000

300,000 100,000

900,000 720,000 180,000 75,000 1,250,000 937,500 312,500 1,100,000 935,000 165,000 75,000 4,450,000 3,492,500 957,500

126 3,000,000 2,550,000 450,000 1,500,000 1,275,000 225,000 1,275,000 1,450,000 400,000 340,000 8,150,000 6,475,000 1,675,000 5,750,000 4,512,500 1,237,500 1,962,500 5,475,000 1,300,000 1,020,000

1,500,000 1,275,000 225,000 2,400,000 1,962,500 437,500

Whether or not these other seven columns are presented to an outsider reader is left to the contractor's discretion; however, all of the additional columns should be included in an inhouse WIP schedule since they clearly highlight the significant details of all contracts in process to members of management. Construction work in progress is a general ledger account, categorized as a fixed asset, in which you record the costs directly associated with constructing an asset. Once the asset is placed in service, all costs associated with it that are stored in the construction work in progress account are shifted into whichever fixed asset account is most appropriate for the asset. The most common fixed asset account to which these costs are shifted is Buildings, since most construction projects relate to that fixed asset. However, the account is also sometimes used for machinery, and as such would store the costs associated with buying, transporting, installing, and testing machinery.

While costs are being accumulated in the construction work in progress account, you should not commence depreciating an asset, because it has not yet been placed in service. Once the asset is placed in service and shifted to its final fixed asset account, you should begin depreciation. Thus, the construction work in progress is one of only two fixed asset accounts that are not depreciated. The other account that is not depreciated is the land account. The construction work in progress account is a prime target of auditors, since costs may be stored here longer than they should be, thereby avoiding depreciation until a later period.