Builders and contractors who purchase land and then develop it have to comply with accounting requirements for revenue and expense recognition that are a little different and require a some modification of the standard QuickBooks set up. The accounting rule is that revenue and costs are not to be recognized on financial statements as income and expense until the job is complete, or in some cases as certain milestones are completed for the job. Many engineering firms, attorneys and other similar organizations like to use work in progress (WIP) accounts as well.
The procedure described here for handling work in progress (WIP) or construction in progress (CIP) in QuickBooks assumes that all revenue and costs will be tracked as assets (for costs) and liabilities (for revenues) until the end of the job, when they’ll be transferred to income and expense accounts.
1. Set up a new account called Work in Progress or Construction in Progress-go to Lists > Chart of Accounts, click the Account button and select New. Select Other Current Asset for the account type.
2. Go to Lists > Item List and change the expense account on your service items to the asset account you set up above. If you don’t see an expense account, click the button next to This item is used in assemblies…”
3. Add two Other Charge items:
a. Transfer out of WIP – with WIP as the account and note in the description that the amount should be positive
b. Transfer into COS – with COS as the account and note in the description that the amount should be negative
4. Make sure to always use the Items tab instead of the Expenses tab on all your transactions
5. If you use Job Profitability reports, modify/filter them to include your WIP account. Click on Modify Report, select the Filters tab, select Account, select Multiple Accounts, check All income and expense accounts and your WIP account. Memorize the report.
6. Create a report to track the amount in WIP by job by going to Reports > Custom Summary Report. Click on Modify Report, select Display Columns = Account List and Display Rows = Customer. Click on the Filters tab, select Account = your WIP account. Memorize the report.
7. Once the project is completed, prepare an invoice or sales receipt with a line for the sales price (mapped to an income account) and then add the two other charge items you created above making sure to use a negative amount for Transfer into COS. Once done, the ending total for the invoice should match the sales price.