Construction-in-progress (CIP) accounting is an essential tool for businesses managing long-term projects or significant asset construction. It helps organizations track expenses for assets under development, ensuring accurate financial reporting and better control over costs.
In this guide, we’ll explore what construction-in-progress accounting is, who uses it, why it matters, and how to effectively manage CIP accounts. We'll also include a practical example to illustrate its application.
What Is Construction in Progress?
Construction in progress (CIP) refers to a type of account used to track costs associated with building or assembling fixed assets during their construction phase. These accounts are part of the "property, plant, and equipment" (PPE) section on a company’s balance sheet.
Unlike completed assets, CIP items are considered long-term or noncurrent assets. They represent significant investments that will eventually contribute to business revenue once completed and operational. Common examples include constructing a new facility, expanding existing infrastructure, or building custom machinery.
Who Uses Construction-in-Progress Accounting?
CIP accounting is commonly employed by industries where large-scale projects require detailed financial tracking, including:
Manufacturing: For building new factories or production lines.
Healthcare: For constructing hospitals or facility expansions.
Retail: For new store builds or renovations.
Aviation and Aeronautics: For building hangars, testing facilities, or manufacturing sites.
Why Is Construction-in-Progress Accounting Important?
Key Benefits:
Cost Tracking: Provides an organized way to monitor and control project expenses.
Transparent Reporting: Ensures accurate financial statements for stakeholders and auditors.
Justification of Investments: Aligns project expenses with the future revenue the completed asset will generate.
Regulatory Compliance: Helps prevent errors, such as overstating income by delaying asset depreciation.
Without proper CIP accounting, businesses may struggle with inaccurate cost tracking, inefficient resource allocation, and potential compliance issues during audits.
How to Use Construction-in-Progress Accounting
Step 1: Identify CIP Expenses
Determine which costs relate to the project under construction. Common CIP expenses include:
Building materials
Vendor fees
Labor costs
Equipment rentals
Permits and licenses
Transportation and installation
Interest on construction loans
Ensure that expenses are recorded in the period they occur to maintain accuracy.
Step 2: Capture Detailed Information
Gather specific expense details from invoices, receipts, and reports. Use precise calculations and maintain comprehensive documentation for audit purposes.
Step 3: Record CIP Transactions
Log all expenses in the CIP account as debits, while recording credits in accounts payable. This dual entry ensures the financial statements remain balanced.
For example, if a construction company purchases $20,000 in steel beams for a project:
Debit: Construction in Progress +$20,000
Credit: Accounts Payable -$20,000
Step 4: Transfer CIP to Fixed Asset Accounts
Once the project is completed and the asset becomes operational, transfer the total CIP amount to the appropriate fixed asset account (e.g., "Building"). At this stage, depreciation for the asset begins.
Example of Construction-in-Progress Accounting
Let’s consider a hospital building a new pediatrics wing. Below is a breakdown of expenses recorded in their CIP account:
Date | Description | Debit (CIP) | Credit (Accounts Payable) |
Jan 7, 2024 | Bricks purchased | $11,000 | $11,000 |
Jan 22, 2024 | Construction costs invoice | $8,000 | $8,000 |
Feb 3, 2024 | Architecture firm invoice | $35,000 | $35,000 |
Mar 11, 2024 | Vendor services (HVAC, etc.) | $96,000 | $96,000 |
Total CIP Balance:
$11,000 + $8,000 + $35,000 + $96,000 = $150,000
Once construction is complete, this $150,000 would transfer to the "Building" fixed asset account, where it will begin depreciating over its useful life.
Best Practices for CIP Accounting
Timely Record-Keeping: Avoid delays in recording expenses to reduce errors and ensure compliance.
Detailed Documentation: Maintain clear records to justify costs and facilitate audits.
Regular Audits: Frequently review CIP accounts to prevent inaccuracies and improper accounting.
Specialized Software: Use construction accounting tools to automate tracking and ensure regulatory compliance.
Why Proper CIP Accounting Matters
Accurate construction-in-progress accounting is essential for project transparency, compliance, and financial stability. By effectively tracking costs and transferring assets upon project completion, businesses can make informed decisions, meet regulatory standards, and justify investments to stakeholders.
For more guidance on construction accounting or professional support with your CIP accounts, contact PVM Accounting today! We specialize in construction financial management, helping businesses build a stronger financial future.
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