Understanding how to account for ongoing construction projects properly is essential for any business in the homebuilding industry. One key element of this process is the construction-in-progress account—a concept that can be confusing if you’re not working with a team familiar with construction-specific accounting.
What Is the Construction in Progress Account?
The construction in progress (CIP) account is a long-term asset on a company’s balance sheet. It tracks all costs associated with a construction project before the asset is completed and ready for use. This includes labor, materials, permits, and other related expenses. Unlike typical asset purchases, construction projects build over time, which means the value is recorded gradually until the project is finalized.
How Construction Work in Progress Accounting Works
In construction work-in-progress accounting, the costs are accumulated throughout the project’s lifecycle. These aren’t recognized as expenses immediately. Instead, they remain in the CIP account until the construction is finished. Once the asset is complete and placed into service, the total value is transferred from the CIP account to a fixed asset account, such as buildings or infrastructure, and depreciation begins.
This accounting method gives stakeholders a more accurate picture of a company’s financial standing by avoiding premature depreciation or expense recognition. It’s also essential for compliance and proper financial reporting, especially for homebuilders juggling multiple projects at once.
Construction in Progress Account Type: Asset, Not Expense
One of the most common misconceptions is that CIP is an expense. The construction-in-progress account type is classified under assets, not expenses or liabilities. Treating it incorrectly can lead to misstated financials and potential tax complications. Keeping clean records and working with professionals who understand the nuances of CIP is key.
At Prince CPA Group, we bring deep knowledge of construction-specific accounting practices. If your business needs help managing CIP entries, interpreting asset classifications, or organizing multi-project records, we’re here to help. Our expertise in homebuilding finance ensures your accounting stays accurate, precise, and aligned with your goals so you can focus on completing projects confidently. For more information on how we can help you reach your goals, contact us today!