WIP Year End Reversal?

skoz5555 · ‎August 25, 2020

Hi,

I am a contractor, thus at month end I create my WIP entry and then reverse it the 1st day of the following month. I ran into a problem this last year end 2019 and hoping someone can explain it to me. Essentially, when I make my reversal on Jan 1, then that month/year is starting out with a postive adjustment to revenue, which doesn't seem right.

Here is my example. Let's say I am overbilled by 20k in April and 5k in May. I make my 20k adjustment in April, then reverse it May 1. When I goto make my adjustment on May 31, it is the 5k because the rev adjustment was washed out by the reversal on May 1.

Same situation at year-end. I'm overbilled 20k in December and 5k in Jan. I make my 20k adjustment in December, and reverse it on Jan 1. Now when I make my 5k adjustment on Jan 31, it is actually a credit instead of a debit to revenue of 15k (20 that is still in there from the reversal minus the 5k). Now I'm starting out the year with financials that don't even match my WIP spreadsheet. (Of course, it washes out on Feb 1 again).

Can somebody explain this to me?

Thanks

john-pero · ‎August 26, 2020

It may depend on which accounts and types you are using to monthly close out your works in progress, which are current assets. I can understand that monthly you are spending money on materials and labor that are not current expenses, thus the adjustments to WIP, but what I am at a loss is why you are reversing this adjustment of expense to asset to begin each month in what I view as an error situation. Even at year end, if you have 20k invested in a job that has yet to be billed to a customer then that other current asset of 20k should be sitting on the books as an asset and you should not be closing it to expense on 12/31 and then back on 1/1

Or am I missing entirely your actual actions or the intent of same

skoz5555 · ‎August 27, 2020

Hi John,

The way POC (Percentage of Completion) accounting in construction works is:

Determine what percent the project is complete by dividing the (total costs to date/total project estimate) = POC
Multiply the total contract amount by the POC. This tells you how much you've actually earned.
Subtract what you've earned from what you've actually billed. The difference becomes the Underbilled or Overbilled amount.

If Overbilled:

Debit Revenue
Credit Other Current Liability

If Underbilled:

Credit Revenue
Debit Other Current Asset

The issue with my original question is when I start the year out, I start out with a balance in the revenue section of the P&L where everything else is zero'd out because it transferred to Retained Earnings.

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