Construction work in progress definition
/What is Construction Work in Progress?
Construction work in progress is a general ledger account in which the costs to construct a fixed asset are recorded. 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, and is reported within the property, plant and equipment line item on the balance sheet.
Accounting for Construction Work in Progress
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, do 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, begin depreciating it. Thus, construction work in progress is one of only two fixed asset accounts that are not depreciated - the other one being the land account.
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Auditing of the Construction Work in Progress 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.