How do I record construction-in-progress charges?
Thursday, June 17, 2010 at 7:53AM A reader asks, "we have construction-in-progress (CIP) for large projects in the fixed asset subledger. Is it best practice to post all accounts payable invoices to the CIP fixed asset subledger even though some of these invoices will be expensed since they may not meet the requirement for capitalization as fixed assets, or is CIP to be used as a tracking device for an entire project regardless of capitalization?"
You should pre-screen CIP-related invoices when they are first entered into the system, so that items to be expensed are charged off at once. They should NOT be stored in the CIP account; otherwise, there is a considerable risk that expensable items will not actually be charged off for some time. As an alternative, if you want to use CIP as a tracking mechanism for an entire project, then create a pair of sub-accounts for it, one of which stores items to be charged to expense, and the other for items to be capitalized. This approach makes it easier to charge off expenses in a timely manner.
Related Topics
Overview of capital budgeting
Overview of depreciation
What is construction work in progress?
When do I stop assigning costs to a fixed asset?
Which costs can I assign to a fixed asset?
Reader Comments (4)
if a company is constructing building and structures with in-house contractors, how should you classify the items bought but not yet used in the construction at year end? Should it be prepaid supplies or inventories? The company is not primarily engage in construction business but in recreational activities.
You could use either one, since they are both assets. I would be more inclined to use an inventory account, since it more closely matches the nature of the items bought.
My company paid property tax in April for April thru June property tax for a construction in progress project.
I booked the payment in full to CIP account when it was paid in April.
Another accountant in the company stated that CIP as of 4/30 was overstated because May and June portion of property tax should be booked to Prepaid account and reclassed later.
My question is: I thought since Prepaid and CIP are both asset accounts, it's ok to book May & June portion of property tax to either account. Is that not correct??
A prepaid property tax is indeed an asset, and so is a CIP account. If the amount of the property tax is immaterial, it is more efficient to simply record it in the CIP account once and be done with it. However, if the amount is material, it is theoretically more correct to first record it in the prepaid assets account and then shift it into the CIP account over time.