Construction in Progress (CIP) is an account used to track the costs associated with the construction of assets that are not yet completed or ready for use. These costs can include materials, labor, and overhead expenses. The CIP account is classified as an asset on the balance sheet, and it accumulates all the costs related to a construction project until the asset is completed and placed into service.
Below are some journal entries related to Construction in Progress:
1. Recording Direct Costs (Materials, Labor, and Overhead)
When direct costs such as materials, labor, and overhead are incurred during the construction process, they are recorded in the Construction in Progress account.
Example 1: Recording Direct Material Costs
Scenario: On January 15, 2024, your company incurs $50,000 in material costs for an ongoing construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-15-2024 | Construction in Progress | 50,000 | |
| 01-15-2024 | To Accounts Payable | 50,000 |
Explanation:
- Construction in Progress will debited to record the direct material costs associated with the project.
- Accounts Payable will credited to recognize the obligation to pay for the materials.
Example 2: Recording Direct Labor Costs
Scenario: On February 1, 2024, your company incurs $30,000 in labor costs for the construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 02-01-2024 | Construction in Progress | 30,000 | |
| 02-01-2024 | To Wages Payable | 30,000 |
Explanation:
- Construction in Progress will debited to accumulate the labor costs.
- Wages Payable will credited to recognize the obligation to pay the workers.
Example 3: Recording Overhead Costs
Scenario: On March 10, 2024, your company allocates $15,000 in overhead costs to the construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 03-10-2024 | Construction in Progress | 15,000 | |
| 03-10-2024 | To Overhead Allocation | 15,000 |
Explanation:
- Construction in Progress will debited to accumulate the overhead costs.
- Overhead Allocation will credited to account for the overhead applied to the project.
2. Capitalization of Construction Costs
Once the construction project is completed, the total accumulated costs in the Construction in Progress account are transferred to the appropriate asset account (e.g., Buildings, Equipment).
Example 4: Capitalizing Completed Construction Costs
Scenario: On June 30, 2024, the construction project is completed, and the total costs accumulated in the Construction in Progress account amount to $95,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 06-30-2024 | Buildings | 95,000 | |
| 06-30-2024 | To Construction in Progress | 95,000 |
Explanation:
- Buildings will debited to capitalize the completed construction costs.
- Construction in Progress will credited to close out the account and transfer the balance to the Buildings account.
3. Recording Interest Costs During Construction
If the company incurs interest costs related to financing the construction project, these costs may also be capitalized.
Example 5: Capitalizing Interest Costs
Scenario: On May 1, 2024, your company incurs $5,000 in interest costs on a loan used to finance the construction project.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 05-01-2024 | Construction in Progress | 5,000 | |
| 05-01-2024 | To Interest Payable | 5,000 |
Explanation:
- Construction in Progress will debited to capitalize the interest costs related to the project.
- Interest Payable will credited to recognize the interest obligation.
4. Adjusting Entries for Construction Costs
If there are any adjustments needed for the construction costs, such as correcting an error or recording additional costs, these entries are made in the Construction in Progress account.
Example 6: Adjusting Construction Costs
Scenario: On July 15, 2024, your company discovers that an additional $2,000 in labor costs was not recorded.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 07-15-2024 | Construction in Progress | 2,000 | |
| 07-15-2024 | To Wages Payable | 2,000 |
Explanation:
- Construction in Progress will debited to adjust the accumulated costs.
- Wages Payable will credited to recognize the additional labor costs.
These examples cover the key aspects of accounting for construction in progress, from recording initial costs to capitalizing completed projects.