Topic: Work-In-Progress
Background
Databuild provides the facilities to record and report construction projects from a management and accounting perspective. The accuracy of the data contained in the system is dependent upon the manner in which the system is used. All results must be verified and analysed.
Construction Work In Progress seems to be the source of confusion and mystery to many in the Building and Accounting fields. Databuild tends to use the term in reference to the calculation and recognition of Profit and in general could be described as being the value of work done but not yet billed or claimed at a point in time. However, the method of calculation and the result is the responsibility of the Builder/Contractor and Tax Accountant, and is in no way the responsibility of Databuild.
It is clear that Builders should be aware of Taxation rulings and the accepted methodologies for profit calculation on construction contracts and clarify such matters with their Tax Accountant.
A point for consideration: the Commissioner considers that the completed contracts basis under which the bringing of profits or losses into account is deferred until completion of the contract is not an acceptable method of accounting for long-term construction contracts. A contract which runs for less than 12 months may still be regarded as a long-term construction contract for this purpose, provided the contract straddles two years of income (Tax Determination TD 92/186).
Job Cost Reporting:
The Job Cost Summary report is the base report for review purposes. There are two WIP calculations which can be performed, Simple and Complex. Typically only current (refer next section) Jobs are selected and the date range should be selected up to the end reporting date e.g. 30/06/2003 with the from date set sufficiently early to include all transactions relating to the reportable Jobs.
Simple: is the resulting value of recorded INVOICES (COST) less CLAIMS (INCOME)
Invoices – Claims = Simple WIP
Complex: is the resulting value of recorded INVOICES (COST) divided by FORECAST (Predicted Final Cost) as a proportion of the revised CONTRACT value less CLAIMS
(Invoices / Forecast) x Contract = Claimable value of work done – Claims = Complex WIP
Complex is a suitable method according to Tax rulings and gives more realistic reporting for management purposes. For this report to be accurate then the Forecast Costs and Contract values must be correct.
Recording WIP Profit adjustments:
Suggested simple journal entries to record Complex WIP are as follows:
Where the net result is a negative on jobs under construction
Debit Income "WIP" Credit Liability "Unearned Income"
Where the net result is a positive on jobs under construction
Debit Asset "WIP" Credit Income "WIP"
The journal would be typically posted on the last day of the month and reversed on the first day of the following month. It must be noted that these are examples of a simple means of adjusting profit on current Jobs under construction, for management purposes. Your Tax Accountant will advise on how Work-In-Progress adjustments should be treated for end of year Tax purposes in your accounts.
Warning: if you are using Timesheet posting or recording other calculated Job costs for internal reporting purposes then any WIP values must take this into account.
Selection of Jobs
Typically Jobs that are still current as at the reporting date (e.g. 30/06/2003) are selected for WIP purposes. Each Job can be manually selected or a more convenient method is the use of the End (Completion) Date field available in the Job screen which is more accurate than the use of Job Status.
The End Date will display the current system date if a value has not been entered and effectively has no actual date recorded for selection purposes. It is recommended that an anticipated completion date is entered when creating the Job and is revised when the Job is actually completed.
The required Jobs can then be selected by using Job Search:
Select through Job Search: Select Jobs where "ALL", Include "End Date" is GREATER than 30/06/2003.
Click on the GO icon and all Jobs will be highlighted as selected for reporting. Then EXIT and select the appropriate Job Cost WIP report and applicable report dates, e.g. 01/01/00 (must set this to include all possible recorded costs on these Jobs) to 30/06/03.
End of Document