What is Construction-in-Progress?

Construction-in-progress (CIP) is an account in which the costs incurred to build a fixed asset are stored. This account is only used while an asset is being constructed, after which the total cost is shifted to another fixed asset account. This account typically contains the costs of labor, materials, and overhead incurred during a construction project. It has a natural debit balance.

Accounting for Construction-in-Progress Charges

You should pre-screen CIP-related invoices when they are first entered into the system, so that items to be expensed are charged off at once. They should NOT be stored in the CIP account; otherwise, there is a considerable risk that expensable items will not actually be charged off for some time. As an alternative, if you want to use CIP as a tracking mechanism for an entire project, create a pair of sub-accounts for it, one of which stores items to be charged to expense, and the other for items to be capitalized. This approach makes it easier to charge off expenses in a timely manner.

Why is Construction-in-Progress Accounting Necessary?

You need to operate a construction-in-progress accounting system when you are constructing assets that will not be completed for an extended period of time. If you do not have a system for tracking construction-in-progress, then some expenditures may be charged to expense instead of being capitalized, while other expenditures may be capitalized without any depreciation for an extended period of time - which misrepresents the profits being reported.