General Inquiries

WIP Adjustment Income Account - Closing?

  • 1.  WIP Adjustment Income Account - Closing?

    Posted 19 days ago
    I have to admit...WIP over/under adjustments have always caused me "deep thought" problems wrapping my head around the whole never ending process. Recently, I came across a small GC that actually CLOSED the Over/Under Adjustment Account in the year end closing process - thereby starting each year off with a ZERO balance. I don't think I've ever seen that. I don't think this is correct. My understanding is that since projects span annual reporting cut-offs, the over/under adjustment account (usually residing in the Income series 4 accounts)  lives in perpetuity - never "closed". It's tied to the over and under balance sheet accounts correct? The way I was taught 150 years ago was to post the over/under adjustment at the end (last day) of each month, then reverse the entry out on the first day of the following month. Can someone confirm this for me, or tell me that I'm just crazy?

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    Stephen Nerheim BS/MBA
    President
    Nerheim & Company, LLC
    Alamo CA
    (925) 768-7722
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  • 2.  RE: WIP Adjustment Income Account - Closing?

    Posted 19 days ago
    Stephen, it would be wrong to close out the over/under unless...
    *  the planets aligned and all of your projects had no over or under billed revenues at year end; or
    *  your projects were all complete and fully billed at year end; or perhaps
    *  the over/under adjustment was immaterial for your financial statement presentation at year end.
    The issue is with revenue recognition.  Without the over/under, you will be materially misstating income unless one of the above apply.
    I have insufficient data to comment on whether you're crazy, but I know a lot of CPAs and accountants and I can tell you the odds are against you :).

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    Steve Hunt CPA
    Cfo
    Alto Construction Company, Inc.
    Tampa FL
    (813) 241-2586
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  • 3.  RE: WIP Adjustment Income Account - Closing?

    Posted 19 days ago
    I close my Over/Under income account out at the end of each fiscal year and start at zero the first day of every year new fiscal year.  The asset/liability accounts live on in perpetuity.  I have two income accounts - billings and over/under.  Those two accounts add to revenue for the year.

    I agree that the Over/Under adjustment is posted the last day and reversed the next day(month).


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    Kevin O'Shea CCIFP
    C.E.O.
    Shamrock Electric Co., Inc.
    Elk Grove Village IL
    (847) 593-6070
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  • 4.  RE: WIP Adjustment Income Account - Closing?

    Posted 18 days ago
    ​Stephen:  Is the Over/Under Adjustment Account you are talking about an income statement account?  It sounds to me like it is.  Your entries go the to over and under balance sheet accounts you refer to and the net amount goes to this "Over/Under Adjustment Account."  Correct?  If that is the case then, yes, the Over/Under Adjustment Account should be zero at the beginning of the year just like every other income statement account.  I suggest you change the name of the account to something like Earned Revenue Adjustment.  Calling it Over/Under Adjustment makes it easy to confuse it with the balance sheet accounts.

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    Susan Milner
    Corporate Controller
    Eldeco Inc.
    Greenville SC
    (864) 312-9896
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  • 5.  RE: WIP Adjustment Income Account - Closing?

    Posted 18 days ago
    Stephen, I agree.   Unless you miraculously finish every job at the end of the year you have now recognized revenue that you have not earned.   Your diagnosis is, not crazy!

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    Ledna Jackson
    Chief Internal Operations Officer
    Del-AIr Mechanical Contractors Inc.
    Kodak TN
    (865) 525-4119
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  • 6.  RE: WIP Adjustment Income Account - Closing?

    Posted 18 days ago
    Stephen,

    I think it is the common to close the income statement adjustment account to RE each yearend. Without doing that, how does your income statement tie back to your current period WIP amounts? I agree, the balance sheet accounts are never closed for reporting, but like any income statement account, the billing adjustment account has to close out to RE so the balance sheet rolls from year to year.

    To your point, the projects span over more than a year, correct, so the balance sheet over/under accounts are accumulating those amounts and should always tie to the WIP. The balance sheet will show you the over/under amounts for the projects to date, while the billing adjustment account on the income statement will show you the net over/under for the reporting period. When we post an over/under adjustment, it's part of the regular monthly entries, if you are reversing the entire entry monthly, I imagine those entries are quite large/material. What is the reason for the monthly reversal? Why not post monthly adjustments?

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    Andrew Paul-hus CPA
    Senior Manager
    RVG & Company
    Fort Lauderdale FL
    (954) 233-1767
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  • 7.  RE: WIP Adjustment Income Account - Closing?

    Posted 18 days ago

    Stephen,

    You are completely correct in your process.  I've done that same process for over 18years.  All our required annual audits come out clean/clear as well.  We are a medium/large GC company in the natural gas industry. 

     

    Adriana Cox

    Controller

    Bluewater Constructors, Inc

     

    Ph# 713-462-8525          

    F# 713-462-4133

     

    IN GOD WE TRUST!

        40yr Anniv BWC-tiny


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