What is project-based accounting?

What is Project-Based Accounting?

For many businesses, all commissioned work is considered a good thing. After all, that’s how your business makes money. However, not all projects are created equal. In fact, some can require more resources than they’re actually worth.

That’s why it’s important to weigh the cost-benefit of individual projects, especially when they fall outside the scope of your usual offerings. But how do you do that efficiently? Project accounting is one tool you can use to evaluate projects and determine if they’re worthwhile or if the margins are too tight.

Project-based accounting is exactly what it sounds like—accounting on a per-project basis. The purpose of project-based accounting is to track project-specific costs and financial benefits. By employing project accounting methods, your business can get a better understanding of which projects add value and how to improve margins.

In this guide to project accounting principles, we’ll define project-based accounting and the benefits it can provide to your business. Read from start to finish for a comprehensive understanding of this approach, or use the links below to go to a specific section.

What is project accounting?

Project accounting is an accounting practice that tracks costs and financial benefits associated with a project. Project accounting allows businesses to assess the financial implications of completing certain types of projects as well as plan out projects to meet contract parameters. By using project-based accounting, you can determine if the costs—materials, time, special equipment—are worth the outcome or financial benefit it yields.

Project-based accounting can be a valuable tool for effective project management by providing a detailed view of project financials and progress.

Project accounting definition: The process of tracking costs on a per-project basis

Project accounting principles to follow

If you’re going to employ project accounting, there are a few overarching principles you should follow:

  • Use a separate accounting system. Project accounting can’t be lumped in with your typical accounting processes—there is much more detail involved.
  • Complete budget forecasting before starting a project. For the most effective use of project accounting, budgeting before starting the project is essential. This will give you a starting point to work from and a basis for measuring progress, identifying red flags, and determining project success and failure.
  • Identify KPIs. Key performance indicators like schedule performance and cost performance can help you ensure that critical aspects of the project are on track.
  • Run reports frequently. Since project accounting is used to track progress and budget, it’s important to run financial reporting frequently to effectively monitor project status and potential issues.
  • Establish cost codes. Using accurate cost codes to identify, track, and compare expenses is essential. Doing so allows you to manage certain types of transactions and more easily perform cost comparison analysis between projects.

Another important thing to keep in mind when it comes to project-based accounting is that accuracy is key—this includes timesheets and resource allocation.

By abiding by these guidelines, you’ll be able to get the most value out of your project accounting efforts.

Project accounting principles

Project-based accounting vs. general financial accounting

The main difference between project-based and general financial accounting is that project accounting focuses only on transactions that apply to that project. However, there are other aspects that differ between the two as well, including the following:

  • Time frame: Standard accounting tracks the transactions for the entire month, while project accounting tracks from the start to the end of that project. A project’s life cycle could be shorter or longer than a month.
  • Cost breakdown: For general accounting, costs are broken down into large, overarching categories like accounts payable and receivable. In project accounting, costs can be broken down into small, highly specific parts—like costs associated with certain project tasks.
  • Factors considered: In general accounting, all aspects of running the business are considered. However, with project accounting, only the factors associated with that particular deliverable are considered.
  • Methodology: In general accounting, there are two general methodologies—cost accounting and accrual accounting—that you must choose between. When it comes to project-based accounting, it doesn’t matter which methodology you use for your financial accounting—it doesn’t affect this process.

Something else to consider is that using project accounting to compare costs is not usually as straightforward as comparative analysis in general accounting. In general accounting, you can simply compare expenses from a previous period with those in the current period.

Complete projects on-time and on-budget with project accounting

However, with project accounting, projects must have similar costs that can reasonably be compared. Otherwise, you won’t be able to gather useful insights other than a general high-level view of the overall benefits of certain types of projects.

When to use project-based accounting

Project accounting can be used for both internal and external projects. There are a variety of circumstances when project accounting rules can be used, including:

  • Regular or one-off projects you complete for clients or customers
  • Creating a new product
  • Planning a new service to offer
  • Taking on new types of projects that fall outside your usual scope
  • Conducting comparative analysis between projects
  • Determining how money should be spent across certain types of projects (how much do you invest in each aspect needed to complete the project?)
  • Project accounting is most commonly used in businesses that work based on contracts for unique projects—like construction businesses and engineering firms. However, using project-based accounting can be beneficial to a variety of businesses.
Complete projects on-time and on-budget with project accounting

Benefits of project accounting

Adding another process to your workflow may give you pause. After all, there are probably already a lot of moving parts already. However, implementing project accounting as a standard part of the process can actually help streamline project management.

Here are some of the key benefits to consider if you’re unsure of whether your business can benefit from project accounting:

  • Provides important insights to project managers
  • Allows you to establish a reasonable budget for a project
  • Improves resource management
  • Helps you gather valuable insights for making bids on future projects
  • Provides real-time updates on the project’s progress and profitability
  • Allows leadership to identify issues with projects and make quick decision to get back on track and reduce costs
  • Helps educate project teams on how every factor can impact a project’s cost and profitability
  • Provides the customer with accurate data for billing and keeping tabs on project progress
  • Helps you determine scope and pricing for similar projects by analyzing actual costs versus estimated costs
  • Improves overall financial management of your business
  • The key takeaway here is that project accounting helps you reduce the risk of project failure by improving overall project management.

How to do project-based accounting

There are several key steps for successful project accounting:

  1. Set up a system for tracking tasks and associated costs.This can be easily done with accounting software like QuickBooks Online, which has a Projects feature that tracks project and job costs. Need more detail? With QuickBooks Online Advanced, you get job costing and inventory management as well. Using project accounting software can streamline this process by tracking transactions and time, keeping financial data organized, and running financial reports for you. It can also automate certain accounting data inputs by connecting invoices.
  2. Create a project budget.Establishing a budget can help you maximize a project’s profit margin. In your project budget, you should include estimates for costs, including labor, materials, and other expenses.
  3. Track transactions, time, and resources used.Now that you have the foundation set up for project accounting, you can start tracking costs. It’s important to emphasize how crucial accuracy is when inputting this data because it can have a domino effect or skew the reporting. This is where automation will come in especially handy.
  4. Review on an ongoing basis.Project accounting isn’t something you set up and forget. You need to check in on the progress regularly to ensure things are going as planned and identify any problems that need to be addressed. With real-time reporting, you can see whether the project costs and progression are aligned with the forecasted budget or if intervention and reassessment are necessary. Without an ongoing review of project accounting, you could find your company in hot water financially because you could start losing money on the project.

For many small to midsize businesses, there is no project accountant to handle project accounting. So, project managers often take on the role of project accounting. However, for many project managers, accounting is a fairly foreign concept. While project-based accounting is a lot less complex, that doesn’t mean it comes naturally. And on top of all their other duties, it may not be realistic to expect them to complete project accounting manually.

Fortunately, accounting tools like project accounting software exist and can save you a lot of headaches.

Introduce project accounting to your business

Do a better job at containing project costs and avoid common project management errors with project accounting. Empower your business to increase your control over projects and their outcomes to help you achieve your goals and grow your company. With next-level accounting software like QuickBooks Online Advanced, project accounting is more streamlined and easier than ever.

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