How to Record Construction-In-Progress Charges
Construction in progress (CIP) is an asset that records the cost of construction work for a long-term asset that is not yet completed. This can include costs for materials, labor, and overhead costs that are directly related to the construction project.
Here’s how to record construction-in-progress charges:
- Record CIP Charges: Whenever you incur costs related to the construction project, you will debit (increase) the Construction in Progress account and credit (decrease) the appropriate account. This could be cash if you’re paying out of pocket, accounts payable if you’re being invoiced, or any other relevant account.
For example, if you paid $5,000 for construction materials, the entry would be:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| Jul 1 | Construction in Progress | $5000 | |
| Bank Account | $5000 |
- Completion of the Project: When the construction project is completed, you will transfer the total costs from the CIP account to the appropriate fixed asset account.
Suppose the total cost of the project was $50,000. At completion, the entry would be:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| Dec 31 | Building (or appropriate fixed asset account) | $50000 | |
| Construction in Progress | $50000 |
After the project is complete and the cost has been moved to the appropriate fixed asset account, you would start depreciating the asset over its useful life.
Remember that only direct costs associated with the construction can be capitalized. Indirect costs or costs associated with delays, such as holding costs, should be recorded as expenses in the period they are incurred. Always consult with a qualified accountant or financial advisor to make sure you’re following the appropriate guidelines.
Example of How to Record Construction-In-Progress Charges
Let’s say you’re constructing a new building for your business. You’ve hired contractors, bought materials, and incurred other costs associated with the construction. Here’s how you could record those costs as Construction in Progress (CIP):
Example 1: On March 1st, 2023, you pay a contractor $20,000 for their work on the building:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| March 1, 2023 | Construction in Progress | $20,000 | |
| Bank Account | $20,000 |
This entry shows that you’ve spent $20,000 on the construction project (increasing your Construction in Progress account) and that money has left your bank account.
Example 2: On April 1st, 2023, you buy $10,000 worth of materials for the building. You haven’t paid yet, so this amount goes into Accounts Payable:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| April 1, 2023 | Construction in Progress | $10,000 | |
| Accounts Payable | $10,000 |
This entry shows that you’ve incurred $10,000 of costs for materials (increasing your Construction in Progress account) and that you owe this amount to your suppliers (increasing your Accounts Payable).
Example 3: Suppose construction finishes on December 31, 2023, and the total cost recorded in your Construction in Progress account is $60,000. You would then transfer this to your Building account, which is a fixed asset account:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| Dec 31, 2023 | Building | $60,000 | |
| Construction in Progress | $60,000 |
This entry moves the accumulated construction costs into the Building account, representing the new asset you now have. From this point forward, you would start to depreciate the building over its useful life.
