Presented by Ono & Chen CPAs, LLC
May 29, 2014
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Full service CPA firm specializing in assisting
clients that work with the WIP Schedule.
Over 95% of our clients are in construction
and/or are government contractors.
We believe in educating our clients and
working with them to help them get to the
next level.
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General Accounting Basics and How to
Save Money on your CPA
Accrual vs. Cash Basis
Percentage of Completion Method of
Accounting
-- Break Time -What is the WIP Schedule?
Detailed WIP example
Let’s Begin!
Make sure to have the following in place:
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Have a dedicated Accountant/Bookkeeper.
Use a CPA or tax preparer that you not only
trust, but someone who understands your
business and your industry.
Understand the requirements of your financial
institution (bank) and insurance company.
What do banks/insurance companies generally look
at:
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Overall Profitability
Balance Sheet including Working Capital
Cash Flow
Distributions to Owners
Timely Financial Reporting
Underbillings/Overbillings (WIP)
Poor Fade (WIP)
Even if you trust your CPA completely, it is important
to have a basic understanding of the financial
statements:
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Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Retained Earnings
Work-in-Progress Schedule
Taking the following steps should
enable you to start saving money on
your CPA bill!
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Make sure to enter your adjusting journal entries
(AJEs) promptly!
Don’t make any changes to prior years’
transactions!
Make sure to reconcile all bank and credit card
accounts monthly!
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Keep account coding simple!
Don’t commingle accounts with your personal
accounts!
Job costing 101 – All job costs should be coded
to a job!
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What is the cash basis of accounting?
What is the accrual basis of
accounting?
Why is it important?
Common accounts on an accrual basis financial
statement that you won’t see on a cash basis
financial statement
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Accounts Receivable
Prepaid Expenses
Accounts Payable
Accrued Expenses
Bad Debt Expense
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What is it?
1. Investopedia definition: An accounting method in
which the revenues and expenses of long-term
contracts are recognized yearly as a percentage of
the work completed during that year.
2. It is a revenue recognition method recognized by
Generally Accepted Accounting Principles (GAAP).
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What is a long-term contract?
IRC Section 460(f)(1): In general, the term "longterm contract" means any contract for the
manufacture, building, installation, or
construction of property if such contract is not
completed within the taxable year in which such
contract is entered into.
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Why is it important?
1. It is the most accurate way to measure revenues
on uncompleted contracts.
2. More importantly, it is probably required by the
bank, surety company, and even your friends at
the SBA!
The most important schedule in financial
statements using the percentage-ofcompletion method is the work-inprogress schedule!
-- Break Time --
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It is a supplementary schedule within the
financial statements of a construction
contractor (using the percentage-ofcompletion method) that shows a financial
snapshot of a contractor’s uncompleted
contracts at a specified time period.
The WIP schedule may be required by your
surety/banks on a monthly, quarterly,
semi-annual, or annual basis.
COST DRIVES REVENUES!!
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Current contract price (including change
orders)
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Total estimated contract cost
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Cost incurred to date (from inception)
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Billings to date
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Estimated gross profit on completed contract
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Gross profit percentage
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Percentage complete
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Revenues earned to date
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Gross profit to date
Formula: Current contract price minus
total estimated contract cost.
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Example: If you sign a contract for $600,000
and you estimate that your total costs will be
$400,000, what is your estimated gross
profit?
Formula: Current contract price minus
total estimated contract cost.
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$600,000 <-> $400,000
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Answer: $200,000
Formula: Estimated gross profit divided
by current contract price
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Example: Using previous example (contract
price of $600,000, total estimated costs of
$400,000, estimated gross profit of
$200,000), what is your gross profit
percentage?
Formula: Estimated gross profit divided
by current contract price
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$200,000 / $600,000
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Answer: 33 1/3%
Formula: Cost incurred to date divided
by total estimated contract cost
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Example: Using previous example (contract
price of $600,000, total estimated costs of
$400,000, estimated gross profit of
$200,000), if your cost incurred to date is
$40,000 on this job, what is your percent
complete on this job?
Formula: Cost incurred to date divided
by total estimated contract cost
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$40,000 / $400,000
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Answer: 10%
Formula: Percent complete times
current contract price
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Example: Using previous example (contract
price of $600,000, cost incurred to date of
$40,000, percent complete of 10%), how
much of your revenues have you earned to
date?
Formula: Percent complete times
current contract price
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$600,000 x 10%
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Answer: $60,000
Formula: Revenues earned to date
minus cost incurred to date
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Example: Using previous example (percent
complete of 10%, revenues earned to date of
$60,000, cost incurred to date of $40,000),
what is your gross profit to date?
Formula: Revenues earned to date
minus cost incurred to date
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$60,000 <->$40,000
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Answer: $20,000
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Ono & Chen Builders secures a job with
Hawaii DOT on 10/1/13 with the following
values:
◦ Contract signed for $500,000
◦ Project manager expects job will cost $250,000
◦ As of 12/31/13, $50,000 of materials have been
purchased for the job
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Estimated Gross Profit
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Gross Profit Percentage
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Percent Complete as of 12/31/13
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Revenues Earned to Date as of 12/31/13
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Gross Profit to Date as of 12/31/13
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Estimated Gross Profit = $250,000
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Gross Profit Percentage = 50%
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Percent Complete as of 12/31/13 = 20%
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Revenues Earned to Date as of 12/31/13 =
$100,000
Gross Profit to Date as of 12/31/13 = $50,000
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Job costing is extremely important as revenues
earned to date are driven by costs. Therefore,
it is important that you properly code all your
job costs!
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Sometimes referred to as overbillings and
underbillings, it is the difference between
revenues earned to date and amount billed to
date to the customer.
These accounts are balance sheet accounts
and are an offset against revenues.
◦ Cost in Excess of Billings is an asset
◦ Billings in Excess of Cost is a liability
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Ono & Chen Builders has earned $100,000
of revenues as of 12/31/13 on a sole
source contract with Hawaii DOT and has
billed Hawaii DOT $50,000 as of 12/31/13.
Ono & Chen Builders has underbilled Hawaii
DOT and must record the following journal
entry on 12/31/13:
◦ DEBIT: Cost in Excess of Billings $50,000
◦ CREDIT: Revenues $50,000
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Ono & Chen Builders has earned
$100,000 of revenues as of 12/31/13
on a sole source contract with Hawaii
DOT but has billed Hawaii DOT $130,000
as of 12/31/13.
Ono & Chen has overbilled Hawaii DOT
and must record the following journal
entry:
◦ DEBIT: Revenues $30,000
◦ CREDIT: Billings in Excess of Cost $30,000
Note: The journal entries for ‘Cost in
Excess of Billings’ and ‘Billings in Excess
of Costs’ are very important. These
entries directly offset revenues.
WIP Example
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Calculation errors and missing cells
Estimated total cost not adjusted with change
orders and other adjustments
Incorrect ‘cost in excess’ and ‘billings in
excess’ journal entries
Ono & Chen CPAs
www.onoandchen.com