Explanation of Work In Process and removing old entries from Work In Process

Modified on Wed, 29 Nov 2017 at 02:23 PM

The Work in Process (WIP) account in the General Ledger and the Work in Process Report under Accounts Payable Reports hold the total of all items purchased from the vendor but not yet invoiced to the client.  This is supposed to be the work in process (progress) or items that the Designer has paid for and is working on installing, it is like temporary inventory. 

The invoice to the client signifies the transfer of title to the client and pulls the goods out of WIP and places them into cost of goods sold.  This also has the effect of matching revenues with costs in the appropriate financial period.  For example, let's say that you purchase $100,000.00 of materials for a project in March.  In April, after the project is completed, you invoice the client for $150,000.00.  If the March cost went directly to cost of goods sold it will appear that you are losing $100,000 in March when actually you will invoicing them at completion for $150,000.  In April it appears that you are making $150,000 in profit with no costs when you are actually only making $50,000 in profit.  Since Design Manager automatically uses the WIP account to hold the costs, you get a matching profit and loss in April because the $100,000 is held in WIP on the balance sheet as an Asset (something your company owns) until April when the client is billed. 

Side Note: At the same time any retainer/deposit monies given by the client are being held in a client deposit liability account.  When the client invoice is generated this is relieved and moved to revenue.

The WIP report lists all items (as of the selected fiscal period) that make up the WIP account balance.  Any items that are old and should not longer be on the report are items that have never been billed out to the client.  These may be items that were given to the client for free, a 100% deposit was already collected on, or items purchased but for whatever reason never sold to the client.   If the items were given to the client at no charge or a 100% deposit was already given then a zero invoice for the goods should still be generated.  This invoice is very important to signify that client has received the goods; this invoice also serves as the proof of collecting sales tax as well as the client's proof the expenditure (receipt).  To create a zero invoice tag each item and use the override button to make the price zero (if the deposit applied does not already make the item zero).  For items that were returned to the vendor or broken, etc. a negative vendor invoice should be entered for the return or damages against the purchase order designated on the WIP report.

For Step-by-Step instructions on Removing Entries from WIP report click here.