[Excel14]

I need some help wrapping my brain around this topic. It would seem to me, that if the “Construction in Progress” account is composed of costs and gross profit, and the “Billngs” account is what the customer is billed, the Billings account would be the asset, while the Construction in Progress account containing “costs” would be the liability. In actuality, the reverse is true. Can someone help me approach this logically?

BEC (2/28/16) ----- 78
FAR (09/10/16)-----
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REG

CIA, CGAP, CFE

[marqzho]

When you think about billing, think about the double entry

When you bill someone, you do the following :

Dr. A/R
Cr. Billing

So Billing can't be an asset 🙂

Think about a real life construction example : If you bill your client but no construction work has been performed so far, you do
Dr. A/R
Cr. Billing
In this case, billing is kind of like an unearned revenue in a sense since no work has been performed.

REG 90
FAR 95
AUD 98
BEC 84

[Excel14]

@marqzho:

Thanks. I just was thinking in terms of a receivable from the customer, so to me that is an asset. Anything cost related (CIP), seemed like it should have a credit balance, and thus a liability. I will try to conceptualize it the way you showed.

BEC (2/28/16) ----- 78
FAR (09/10/16)-----
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[Spartans92]

@Excel.. What chapter is this in becker? I remember learning this in intermediate Accounting class but don't recall becker covered too in depth about CIP under the %of completion or completed contract. LOL. Time to review soon..

BEC- PASS

[Excel14]

@Spartan:

Not sure in Becker, I'm using Gleim.

BEC (2/28/16) ----- 78
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[Spartans92]

Gotcha, seems like Gleim does a better job than becker on this topic then. Good Luck!

BEC- PASS

[Excel14]

Thanks. You too. Scheduled for May.

BEC (2/28/16) ----- 78
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[Stilgoin]

I think of it like this- I did this work, I billed the client, they have not paid me, so they owe me- hence a liability. When they pay me, I have an asset. I have to equate things to real world in order to understand them.

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[Anonymous]

Excel14 you can see the concept in CIP in a purchase of a finished fixed asset (machine or building) . When a company buys it, the cost (purchase price) becomes the asset account (depreciable base) so it is capitilized. Also the necessary cost that were incurred in order to make it functional (shipping, installment ect) gets capitilized too. The same thing occurs with CIP. When the construction is finished all that cost gets transferred into a fixed asset account and then it starts to get expensed (depreceated)(unless is a Land). That way you comply with the matching principle (match the respective revenues or benefits from the machine as years go by with its respective cost)

[Excel14]

@stillgoin,

If I did the work and they owe me, my thinking was it is a liability to the other party, but it would be an asset to me. I think I'm over thinking it maybe. Like I said, I will try to break out of my line of thinking. Thanks everyone!

BEC (2/28/16) ----- 78
FAR (09/10/16)-----
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[Anonymous]

I think the way @stillgoin stated it isn't correct. His thought process may work for him, but it does sound incorrect the way it's stated.

“Billings” is a weird term, and I don't think it's used much in the real world. “Unearned revenue” would be much more common.

I think the entry you're picturing in your head that's confusing you is one between CIP and Billings, which wouldn't be likely to exist. Here's the way I see things happening in real life:

Smith & Co builds a building with no specific customer in mind, just building it to sell after they build it. They buy $100,000 of materials on Jan 1 then on Jan 31 pay $50,000 (including benefits, taxes, etc.) in wages for work on the building.

Jan 1 entry:
DR CIP $100,000
CR Cash $100,000 (or A/P, but we're using cash payment to keep it simple – this company's loaded with cash 😀 )

Jan 31 entry:
DR CIP $50,000
CR Cash $50,000

On Feb 1 the building is inspected and certified complete (I can't remember the term for a commercial building…is it still a certificate of occupancy that it's given?), so the company moves it from CIP to completed buildings. Then on Feb 15 the building is sold for $200,000.

Feb 1 entry:
DR Buildings for Sale $150,000
CR CIP $150,000

Feb 15 entry:
DR Cash $200,000
CR Buildings for Sale $150,000
CR Gain on Sale $50,000 (or Profit from Sale?)

(Note: I might be off on the gain vs. profit etc, I don't work in an industry where we're in the business of building and selling buildings, so not sure of the classifications, but the point should still come across…)

So that's a classic CIP situation (except it'd go on for much more than 6 weeks from start of project to final sale).

Billings (or unearned revenue) would be like….

Jones & Co. contract with Merck Pharm to build a store. Merck agrees to pay 20% of the anticipated $200,000 total price at the start of the project, with the remainder due at the conclusion of the project. Jones & Co. Merck for the agreed upon 20% on Jan 1 and also orders supplies. On Jan 5 they receive the supplies with invoice for $35,000. On Jan 15 they paid $20,000 of wages related to this project.

Jan 1 entry:
DR A/R $40,000
CR Unearned Revenue/Billings $40,000

Jan 5 entry:
DR Unearned Revenue/Billings $35,000
CR A/P (or Cash) $35,000

Jan 15 entry:
DR Unearned Revenue/Billings $5,000
DR A/R (or CIP?) $15,000
CR Cash $20,000

Then the remaining entries to finish the building would be the same as above, except maybe using A/R instead of CIP. I'd think of it as A/R, since Merck has agreed to pay for the building, but maybe it's CIP until they do. Again, not a construction accountant, so not sure the specific terminology. 🙂 However, the point is, CIP and Billings are on the same side of the entry, not on opposite sides. If on Jan 20 Merck paid $50,000, and there were no more expenses, then it'd be DR $50,000 cash, CR $15,000 CIP/AR (to clear it out), and CR $35,000 Billings (the difference between expenses and received cash against unearned). So, Billings is like CIP's cousin, always on the same side of the entry.

[marqzho]

Example for you:
you are a construction company, you have this project :

Contract price = $30, budget cost = $20, so estimated profit = $10

you start building it and $5 cost incurred
Dr. CIP 5
Cr. Cash 5

So as of today, you have a cost of $5, since budget is $20, you are 25% completed on the project.
you need to recognized income
Dr. CIP 2.5
Cr. Gross Profit 2.5 <–(Estimated profit of $10 *25%)

Up to this point above there is no billing involved, now what amount are you going to bill your customer?

Case 1 :
If you send a bill to your customer for $7.5
you will record
Dr. A/R 7.5
Cr. Progress Billing 7.5
Since you are 25% done on the project, you should have already earned $30*25% = 7.5 (also total CIP recorded above$5 + $2.5), and you bill $7.5. Everything good and lovely, no asset or liability

Case 2 :
If you send a bill to your customer for $1
you will record
Dr. A/R 1
Cr. Progress Billing 1
Since you are 25% done on the project, you should have already earned $30*25% = 7.5(also total CIP recorded above$5 + $2.5), and you bill $1. Meaning there is a $6.5 you are going to get in the future, it represents a future economic benefit as a result of past transaction. Hence the $6.5 is an asset to you.

Case 3 :
If you send a bill to your customer for $20
you will record
Dr. A/R 20
Cr. Progress Billing 20
Since you are 25% done on the project, you should have already earned $30*25% = 7.5(also total CIP recorded above$5 + $2.5), and you bill $20. Meaning there is a $12.5 you billed but not yet earned. It represent a future economic obligation just like a unearned revenue, Hence it creates a liability

Note: Progress Billing solely is not a balance sheet item but the excess portion. If you go and look a real F/S, you will see there will be an asset item:”Costs and estimated earnings in excess of billings on uncompleted contracts ” =Case 2
and a liability item :”Billings in excess of costs and estimated earnings on uncompleted contracts ” = Case 3

Hope that help 🙂

REG 90
FAR 95
AUD 98
BEC 84

[Stilgoin]

I know it is weird they way I remember this, but it works for me. It is a liability to me because I invested my work, effort and materials, but I haven’t gotten paid. It is an asset once I have gotten paid for my investment. If this confuses you, then ignore me, but I use whatever works for me. 😉

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[marqzho]

“It is a liability to me because I invested my work, effort and materials, but I haven’t gotten paid “

Yes, it does seem weird when you have a liability because of someone owes you $.

but whatever works for you. =]

REG 90
FAR 95
AUD 98
BEC 84

[Stilgoin]

I have a liability because I gave economic benefit to someone and it cost me time and money that I did not get back. Lol

FYI- we own a business. I have a different perspective about liabilities and assets. I know that we do not necessarily have to owe a $ bill to have a liability. I guess that is why I see this differently.

B | 62, 78
A | 73, 67, 79
R | 82
F | 59, 59, Waiting

Ethics | 93

"Success is not final, failure is not fatal: it is the courage to continue that counts."
~Winston Churchill

“In a world full of critics, be an encourager."

[Author]

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