Work in progress accounting: what should be included at year end?

Work in progress (WIP) accounting matters when a job, project or contract was underway at the year end but not yet finished, billed or fully recognised in the accounts.

If WIP is missed or guessed, your accounts can show the wrong profit. That can affect Corporation Tax, dividends, management information and the decisions directors make.

None of that has to happen. Getting WIP right mostly comes down to knowing what was unfinished and valuing it fairly – and keeping enough detail to explain the number later

What is work in progress accounting?

Work in progress means unfinished work at the accounting year end.

For example, your business may have:

• Started a client project that continues after the year end
• Bought materials for a job that is still in progress
• Used employee or subcontractor time on unfinished work
• Incurred project costs before raising an invoice

Work in progress accounting is the process of determining how unfinished work should be reflected in the accounts.

The right treatment depends on the type of work, the contract terms and how income and costs are recognised. However you arrive at it, the figure should come from the jobs themselves – what each had cost and how far it had got – not a number dropped in to make the accounts look right.

Which businesses need to think about WIP?

WIP is often thought of as a construction thing. In fact, it can affect any business that works on jobs, projects or contracts. For example, they may include:

• Construction companies
• Architects and engineers
• Consultants
• Marketing agencies
• Manufacturers
• Software developers
• Professional services firms
• Businesses that make bespoke products

In essence, if your business has unfinished work at the year end, WIP applies to you.

Why does WIP matter?

Work in progress accounting matches work, costs and income to the right accounting period.

Suppose a consultancy has spent £8,000 of staff time on a project before the year end. The work is not finished, and the client will not be invoiced until the following month.

If that £8,000 is treated only as a cost in the current year, your profit will look lower than it should. When the invoice is then recognised entirely in the next year, that year looks better than it should. WIP removes the distortion.

The opposite problem can also happen. If unfinished work is overvalued, the accounts may show profits that are too high.

What should be included in work in progress?

Work in progress accounting is usually based on costs that relate directly to unfinished work: materials, subcontractor costs, direct labour, production costs or other project costs.

Some businesses also include a share of overheads. Whether that applies depends on how the work is done. Either way, your accountant needs to understand what has been completed and what is still left to do.

The important thing is not to produce a perfect-looking estimate with no backing. A simple, well-explained figure is more useful than a vague total.

What information does your accountant need?

Your accountant may ask for a list of unfinished jobs at the year end. For each one, it is useful to provide:

• The customer or project name
• The stage reached at the year end
• Costs incurred before the year end
• Invoices already raised
• Invoices raised after the year end
• Expected final billing value
• Any known problems with the job
• Whether the project is expected to make a profit or loss

This is the kind of detail accountants often have to untangle when year-end records arrive late. Preparing it early makes the accounts process smoother and gives everyone more confidence in the final figures.

Common work in progress accounting mistakes

WIP causes problems most often when it is left until the accounts are being prepared. Common mistakes include:

• Not reviewing unfinished jobs at the year end
• Estimating with no supporting detail
• Forgetting staff or subcontractor time
• Including costs that do not relate to unfinished work
• Double counting income already invoiced
• Ignoring loss-making projects
• Treating different contracts in the same way

These mistakes make the accounts less reliable and lead to more questions from your accountant.

When should you review WIP?

Review WIP shortly after the year end, before the accounts work begins. That gives you time to check project records, find missing costs and explain unusual items while the details are still fresh.

For private limited companies, annual accounts are normally due at Companies House nine months after the financial year end. Even so, WIP should be dealt with much earlier. Reconstructing unfinished project information months later is slower, harder and less reliable.

Need help with work in progress accounting?

Work in progress accounting can affect your profit, tax liabilities and year-end accounts.

THP helps businesses prepare year-end accounts, review accounting records and understand how unfinished work should be treated.

If you need help with annual accounts or work in progress accounting, speak to a member of the THP team on 0800 6520 025 or contact us using the form below.