Construction accounting consists of three major groups of accounts. The first and most understood set are the accounts found on the profit and loss statement. Customarily referred to as Cost of Goods Sold or Costs of Construction, these accounts convey the total costs of construction against the revenue earned for those contracts. The second major group is located on the balance sheet in the current assets section. This group is called the ‘Construction in Process’ (CIP) accounts. The third major group is also located on the balance sheet down in the current liabilities section and is called ‘Construction Billings’ or ‘Construction Deposits and Draws’.
This article explains the balance sheet accounts related to Construction in Process. I will explain how they are designed, formatted and presented. In addition, I’ll explain the impact either the completed contract or percentage of completion method has on the corresponding project’s account balance. Finally, I’m going to explain to you how to interpret the information presented.
In another article I will go into detail related to Construction Billings and the corresponding deposits and draws. This article will focus on the Construction in Process/Progress or what is commonly shortened to CIP.