Ho could I account for 'work in progress'?

First of all, I clearly need to learn ho to spell my post titles properly.

Yes, I could use the time tracking as you suggest, just to keep a record of the time. The main thing is the balance sheet though, because that 'income' needs to be included in the tax calculation.

Wolf.

Apparently not:

"A change in accounting practice means that where you have a service contract in progress at the end of your accounting period, your accounts must include a proportion of the contract income – including your profits – corresponding to the stage of completion of the contract. For example, if the contract is 60% complete, then 60% of the income must normally be included in your accounts, even if you cannot bill it yet.

The change was imposed by the Accounting Standards Board rather than through a change in tax legislation. But HM Revenue and Customs (HMRC) has said that it expects all businesses to adopt the new practice, which goes by the title UITF 40, for periods ending after 22 June 2005. This will generally result in a one-off ‘catching-up’ tax charge in the tax year in which that accounting period ends – 2005/06 or 2006/07. For some businesses, this extra tax could be 50% or more of their normal tax bill, but most businesses will be able to pay it over three to six years.

When UITF 40 was first announced, many people thought it only really covered accountants and solicitors. It has since become clear that many other business sectors will be affected if they perform service contracts over a period of time. For example doctors, dentists, architects, builders, letting agents, independent financial advisers, IT consultants, even farmers may have to recognise some of their income at an earlier stage. What is more, the new practice applies to limited companies as well as partnerships and sole traders. "

This may be too simple but the easiest way to do this would be to calculate the value of the work in progress (WIP) outside FAC and then introduce it at the year end by crediting an income account and debiting WIP to the balance sheet as a current asset.

Depending how involve/complicated you want it you could then at the beginning of the following year reverse the entry or continue to show it as WIP & adjust it monthly/quarterly (but be careful with leaving it unadjusted too long as it may distort the profits).

@Ed, My own view is the more complicated (automated?) the calculation of WIP becomes the more chance there is of errors.

I'm guessing that WIP is only important at the year end.

If it's constantly being calculated & updated some of the profit each month will be unbilled work. It's bad enough to suffer a loss after the work has been invoiced but the client decided not to pay that amount. This is introducing another uncertainty.

Why not allow the information to be extracted which will allow a manual & hopefully considered calculation of WIP!? The figure could then be entered at the year end and reversed on day one of the new year.

First the gobbledegook!

1. WIP is not an accrual or a prepayment. It should be a separate current asset.
2. I would tend to show the WIP separately on the P&L account rather than add it to sales.

Then the surprise:

The basic premise is fine!

I thought I'd resurrect this thread, and give people a heads-up.

In previous years I only booked revenue when I actually raised an invoice, so if I did some work at the end of one company year and then raised the invoice at the beginning of the last year, the revenue counted against the later year. This seemed reasonable to me and my accountant was fine with it.

For the year just gone my accountant has just told me that the revenue are cracking down on this and that I now needed to provide a Work In Progress amount, so that I account for revenue when I do the work, rather then when I invoice for it, so that I pay more tax earlier.

Personally, I think it stinks - having to book revenue and pay tax on work you haven't even invoiced for, let alone received the money for.

But if this is what we have to do, shouldn't the balance sheet in FreeAgent have a line that says: "work done but not yet invoiced" - it can pull this figure from the Time section?

I thought it might be worth moving this up the priority list if the W.I.P. calculation is getting more important to HMRC.

Thanks. Peter.

Whatever is decided I would still recommend this approach:

Make sure you think about the value of the WIP and the figure which appears in the final accounts is a considered calculation of the value of the WIP and not just a calculation based on hours multiplied by hourly rate?

Your accountants should be helping you arrive at the correct value not just accepting the figure you give them. After all it may be too high!

WIP can be complicated. What I wanted to point out was that it isn't always hours x rate.