Work in progress

[ittony]

How important is it to account for work in progress when doing the end of year accounts?

Is it actually a firm requirement that project work needs to be split into the proportions that fall either side of the company's accounting year, and/or either side of the financial year?

Cheers, T.

[Danbro]

Danbro

Hi T,

Work in progress should be accounted for at cost, this follows the rules that profit should only be recognised when it is realised and also uses the matching concept of matching income with expenses.

So Ideally you would account for WIP at cost and this would contra off the expenses incurred in generating the future income

Hope this helps

Thanks
Neil

[ittony]

Hi T,

Work in progress should be accounted for at cost, this follows the rules that profit should only be recognised when it is realised and also uses the matching concept of matching income with expenses.

So Ideally you would account for WIP at cost and this would contra off the expenses incurred in generating the future income

Hi Neil,

Thanks very much for your help, I'm still confused though I'm afriad, possibly more so.

Accounting for work in the period it's performed would seem to contradict the principal that profit should only be recognised when it is realised. For instance, I'm just about to pay corporation tax on some work which was uninvoiced by the time my first accounting period ended, and is still unpaid to date.

Another aspect I'm increasingly unsure about is whether this method is actually a legal requirement, as the impression I've been given so far is that HMRC are pretty cool about it one way or the other, which seems unlikely somehow. Your use of the word 'ideally' above does nothing to detract from this impression!

Cheers, T.

[Danbro]

Danbro Accounting Limited

Hi Tony,

I have PM'd you my details, it would be very difficult giving a full answer without further details and easier to explain over the phone

Thanks
Neil

[QwertyBerty]

My financial year end is end of March, I wasn't paid for March until sometime in April but nevertheless I believe it's correct to account for March in the 2007/8 accounts.

QB.

[xoggoth]

It would not make difference taxwise now there is no tax-free profit so can believe the taxman is not that bothered. Income usually included with year it was invoiced not paid. I would not attempt to apportion payment due for work where no invoice has even been issued, unecessary complication. Accounts for Companies House purposes are supposed to give a fair view of the company, they don't need to be accurate to the last percentage point.

[VectraMan]

I asked this once before, in reference to my year end falling in the middle of the week whilst invoicing weekly. The answer was that yes technically the part week should be counted in the accounts, but nobody would have a problem with a couple of days. If you'd done 10 months of work and not invoiced it would be different.

Seems to be another case of there are no clear rules, just an interpretation of what's "reasonable".

[Alan @ BroomeAffinity]

Accounting for WIP at cost would probably be minimal as you preumably pay yourself a small salary and that would most likely be the only cost attributable to uninvoiced sales. So, if its a week the WIP cost could be as little as £5435 / 52 = £104.51. (On 2007-8 rates). If you assume a day rate of £300, then deferred sales is likely to be £1,500. The tax deferred would be £1,500 - £104.51 * 20% = £279.09. However if you have deferred the sales then you'd need to pay tax on it in the next year abnd the tax rate has gone up to 21% so you'd pay £293.05 so the method would acutally cost you £14.

[THEPUMA]

You cannot account for WIP at cost. It must be accounted for at sales value unless it is for some reason contingent. See http://www.hmrc.gov.uk/manuals/bimmanual/BIM33185.htm