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Your accounting software records work in progress but does not automatically adjust your books to reflect the value of your work in progress. Rather, the software waits until the work is billed before making accounting entries. This support note provides a method that enables you to reflect work in progress in the meantime.
What is work in progress?
Work in progress are the activities that have been performed by a business that are yet to be billed. From an accounting perspective, this should be recognised in the financial statements at the end of the month, as the activities conducted should result in future cash flow.
How do I adjust my general ledger to reflect work in progress?
- Create a new Income account called 'Work In Progress - Income'. To do this: Go to the Accounts command centre and click Accounts List then click New. See our example Income account below.
- Create a new Asset account called 'Work In Progress - Accrual'. See our example Asset account below.
- At the end of every month, run the Activity Slip [Activity Detail] report. In the report filters, be sure to select a date in the From field that will include all open activities. Enter the last day of the current month as the To field. The grand total of the Balance column is your month end work in progress amount. See our example report below.
- Create a general journal entry at the end of the current month for the value of the work in progress amount. A credit should be applied to Work in Progress - Income and a debit should be applied to Work in Progress - Accrual. We have assumed the amount in this example is $1,470. Record the transaction. See our example transaction below.
- Create a general journal entry for the first day of the following month for the value of the work in progress amount. This transaction will clear out the prior month's work in progress amounts. If you don't enter this reversing entry, the work in progress will be double counted when entering this month's work in progress amount in to the general ledger. A credit should be applied to Work in Progress - Accrual and a debit should be applied to Work in Progress - Income. Record the transaction. See our example transaction below.
Hint: You may want to save the two general journal entries as recurring transactions. You can then use the recurring transactions every month and only the amounts will need to be changed. Our support note Recurring transactions has more information on this.