Project accounting
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Project accounting is a type of
While project accounting was traditionally used for large construction, engineering, and government projects, it has now expanded into several other sectors.[citation needed] It is commonly used by government contractors, where the ability to account for costs by contract (and sometimes contract line item [CLIN]) can be a requirement for interim payments.[3] A specialized form of project accounting, production accounting, is used by production studios to track an individual movie or television episode's costs.[3]
The capital budget processes of large corporations and governmental entities are chiefly concerned with major investment projects, which typically have significant upfront costs and benefits realized over the long term. Investment "go/no-go" decisions are largely based on net present value assessments; project accounting and cost/benefit analyses provide vital feedback on the quality of those decisions.[3]
Practice
Projects (which may be independent undertakings or occur as part of a larger
Project accounting (which involves elements of management accounting and financial accounting) is differentiated by a number of unique practices:
- A separate accounting system or cost center is used to track and report project-specific transactions with revenues, costs, assets, and liabilities identified and allocated to the project. Costs (both direct and overhead) and revenues are allocated to projects, which may be subdivided into a work breakdown structure, and grouped into the project hierarchies.[3]
- Reporting is done frequently, with the pace often increasing as a project approaches completion.
- Detailed reports are often accompanied by a separate layer of simplified reports, which examine key performance indicators (KPIs) to indicate whether a project is "on track". Reports can be made at any level that has been defined, and are often compared with historical and current budgets.[3]
- Transactions are allocated to the specific project accounting systems based on a process for identifying them among transactions in the primary accounting system.[2]
The role of a project accountant depends on a project's needs. They often monitor the financial progress of projects, investigate variance, and approve expenses, while ensuring that project billings are issued to customers and payments are collected.[5] Project accountants play a dual role of gatekeeper (reporting a view of how the project is tracking financially) and advisor (advising the project team on the financial treatment and implications of decisions). The project accountant can also act as a liaison between the project itself and the business's financial or accounting departments.[6]
Where labor costs are a significant portion of the overall project cost, it is usually necessary for employees to fill out timesheets in order to generate the data to allocate project costs.[7][8]
Percentage of completion
While the percentage-of-completion method permits companies to track profits while progress is made toward completing projects, this method cannot be used effectively when uncertainties exist about the percentage of completion or remaining costs.[9] The percentage-of-completion may be measured in any of the resulting ways:[9]
Cost-to-cost method
In the cost-to-cost method, a project's cost to date is compared to the total expected cost of the project. The costs of products already bought for a contract, but not installed, should not be added in calculating the percentage of completion (unless they were specifically obtained for that contract). Furthermore, the cost of equipment is assigned over the course of the contract, rather than directly, unless title to the supplies is being transported to the customer.[9]
Efforts-expended method
In the efforts-expended method, the share of effort consumed to date is compared to the total effort expected for the project. For example, the completion percentage may be established on direct work hours, machine hours, or quantities of material.[9]
Units-of-delivery-method
In the units-of-delivery method, the portion of units delivered to the buyer is compared to the overall number of units to be delivered under the terms of a contract.[10] This method, obviously, can only be used on projects consisting of the delivery of multiple units. The calculations involve revenue (the contract price of units delivered) and expenses (the costs that can be reasonably allocated to the units delivered).[9]
Production accounting
Production accounting is used to manage finances and financial records in the
See also
- Accounting
- List of accounting topics
- Accounting software
- Project management
- Project management software
- Business process improvement
- Project manager
- Project audit
- Financial accounting
- Management accounting
References
- ^ a b "What is Project Accounting? - Project Accounting Australia". Project Accounting Australia. Archived from the original on 2018-08-26. Retrieved 2017-11-10.
- ^ a b Lachal, Justin; McNeil, Charles; Tong, Lincoln; McCoy, Kevin (September 2016). "Project Accounting". Business Insights. Chartered Accountants Australia and New Zealand.
- ^ a b c d e "Software Guide and Definitions". Accounting Software Experts. 2015. Archived from the original on 2016-06-16.
- ^ Rothergill, Rik (4 March 2014). "Abel's Project Accounting". Abel Software. Archived from the original on 30 May 2019. Retrieved 10 Nov 2017.
- ^ "Project accountant job description". AccountingTools. Archived from the original on 2017-11-10. Retrieved 2017-11-10.
- ^ Gofman, Dina; Duggineni, Lourdes (28 Aug 2016). "Why your finance team might cut your project budget?". projectaccounting.com.au. Archived from the original on 10 November 2017. Retrieved 10 Nov 2017.
- ^ a b Thomson, Jessica. "What You Know About Project Accounting". editorialtoday.com. Archived from the original on 10 May 2017. Retrieved 10 Nov 2017.
- ^ Finch, Curt (November 2007). "Why Project Accounting?". Strategic Finance. November 2007. Institute of Management Accountants: 25–29.
- ^ a b c d e f "Percentage of Completion Method". Accounting Tools. Archived from the original on 10 May 2017. Retrieved 10 Nov 2017.
- ^ "Percentage-of-Completion Method". Money-Zine. Archived from the original on 28 July 2017. Retrieved 10 Nov 2017.
- ^ "What Is The Job Of Production Accountant?". Accounting Crossing. Archived from the original on 11 November 2017. Retrieved 10 Nov 2017.