Work in Process as a Control Account
Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!
A control account in the Chart of Accounts is used when there is a need to separate multiple third parties with a similar function. Work in process works perfectly as a control account.
In this article I’m going to explain the old method used to track projects and how the control account makes entering data faster. But more importantly retrieval of project information remains alive even after completion of the project.
Work in Process – Historical System
The method used in the past and still used today by some bookkeepers is the parent-child system for account structure. A master account is created in lieu of an account for each project. Then a child account is created for each project as an extension similar to below:
Account Number Description
1200 – Work in Process Master Account
1200-01 Project ‘A’ Smith Family Room Addition
1200-02 Project ‘B’ Carson Family Bathroom Remodel
This system works well as the values in the respective child accounts equal the total value in the parent account, i.e. the children feed information to the parent.
So what are the drawbacks?
During the closing process when the project is complete the values in the child account are summed up based on groups of cost such as materials, labor and subcontractors. A corresponding credit value for each group is included in the child account as the debit is transferred to the respective costs of construction. Now the value in the child account is nulled out to zero. So any chance of reviewing details about the project in the future have been cleared out the child account.
What is a better solution?
Work in Process – Control Account
This is very similar to the parent-child configuration. With control accounts, subsidiary accounts are used and not sub-accounts. With a control account in the Work in Process (WIP) the project identifier is the subsidiary account, just like customers in accounts receivable. At the point of entry, you simply choose the WIP account ID which is usually a numbered identifier like 1200 and then enter your data. Somewhere in the entry field is the customer identification or project ID number (projects are treated like customers). This posts the information to the WIP account, specifically to the project just like the parent-child configuration.
*In QuickBooks, the job name is used instead of customers and the field to select the job is all the way to the right on the entry screen.
The advantage of this system is in how the closing process is conducted. The key is for the project to retain the original entries so that in the future you can compare similar projects or review a particular closed project.
The site goes into extreme detail about the transfer process of costs in WIP to the costs of construction section of the income statement. Please read: TRANSFERRING COSTS FROM WIP TO COST OF SALES.
The secret is that in the transfer the dollar values are not assigned to a subsidiary account (job or customer ID) but are assigned only to the control account ID (WIP or Account Number for WIP). This way the subsidiary retains information in it as if it were still active. But the main value in the control account remains correct in the aggregate.
This form of managing work in process is extremely helpful when using phase account and class accounting. ACT ON KNOWLEDGE.