What is construction work in progress?
Construction work in progress is a general ledger account in which the costs are recorded that are directly associated with constructing an asset. This can be one of the largest fixed asset accounts, given the amount of expenditures typically associated with constructed assets. The account has a natural debit balance.
Once an 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 the 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. If so, reported profits are higher than should be the case.
Related Topics
Overview of depreciation
What does capitalize mean?
What is capitalized interest?
What is the correct capitalization limit?
Steven Bragg
Reader Comments (2)
We have a large software product that we're working on. We're implementing the product to all of our accounts. When would shuold we capitalize the development cost? Can we use % of completion in this case, with each implementation shift the cost over?
Software development is a complex area of accounting. You should consult with your auditors regarding how to capitalize these costs, as well as which costs can be capitalized. The relevant accounting standard is Statement of Position 97-2.