Project Accounting

1. UNIT IV

2. • Project accounting focuses on the financial transactions related to managing a project including
costs, billing and revenue.
• Professionals such as project managers and accountants use this method to integrate key financial
tasks on a project-by-project basis and report their progress and success to management.
• Project managers rely on project accounting to inform them of the status of direct costs, overhead
costs and any revenues in a specific project.
• Project accountants generate these figures in financial reports.
• A project manager uses these reports to determine if they need to adjust the project’s budget and
work breakdown structure (WBS).
• Project accountants often develop a project accounting plan to ensure the projects they manage
are completed on-budget and on-time.
PROJECT ACCOUNTING

3. • This plan gives every cost element in the project and includes regular—even daily—checks.
Managers can track the expenditure of resources, such as people, via their timesheets and adjust
allocated hours, if necessary.
• Project accounting also includes internal projects such as construction builds, new product launches,
advertising campaigns, research or clinical research, long-range purchases and company strategic
planning.
• These are capital projects with discrete beginning and end periods that are not business-as-usual
type work.
• Project control is another essential accounting procedure. Any deviations from the project plan
affect the project’s bottom line. Project control can achieve significant cost savings during the
planning and design phase, as well as in the advanced stages of the project.

4. • Although project cost accounting principles have a different intent and scale than standard
financial or management accounting in business accounting, they are the same concepts. Project
accounting (project cost accounting) tracks costs to the project in addition to billing and revenue
recognition for project profitability.
• Standard business accounting tallies expenses, revenues and budgets across an organization.
Business-as-usual accounting focuses on revenue and expenses by department and looks at the
revenue stream.
• The project accounting methods are the same whether they are for business-as-usual or specific
projects and whether accountants use an accrual, cash-basis or some hybrid accounting method.
• Accountants have a wide variety of calculations to choose from to meet the methodological
requirements.
PROJECT COST ACCOUNTING

5. Project accounting sets itself apart from standard accounting by
using different systems, processes and reporting standards. The
method should include:
• Separate System of Accounting: This process is more detailed than overall company finance
tracking, and accountants may want to use more granular accounting. In some cases, the company’s
financial application may let them complete all accounting processes in one program.
• Reporting Frequency: Projects require frequent reporting to ensure they are on track financially
and meeting deliverables. Accountants may want to increase their report frequency, especially
when the project and its contract are coming to an end.
• Simplified, Specific Reports: Project managers and accountants should determine the key
performance indicators (KPIs) specific to the project. For example, when staff is not meeting a KPI
such as budget variance, the dashboard could show the figure in red. When the project manager
sees the red number, they know quickly they must adjust either the budget projection or their plan
to meet it.

6. • Transaction Identification Processes: Accountants and project managers should work
together to set up processes that identify project-specific transactions. This way, they can
allocate these transactions to the appropriate cost centers.
• Forecasting: Project managers should forecast the project budget and update this forecast as
the project progresses and through completion. Stakeholders are often concerned about the
ongoing financial progress and completed cost, as well as the required deliverables. Initially,
these project costing activities develop a forecast with a defined scope that completes the
overall cost estimate.

7. Project accounting also focuses on resource management. Every project
requires internal resources, external resources and in some cases, third-
party material costs.
 Typically, the most expensive cost is the labour worked by resources on a project. There are
a variety of costs and billing rates based on services provided, expertise, location, etc.
Materials, such as third-party costs or pass-through expenses, have initial and subsidiary
costs. Materials may incur additional costs for a late delivery or if installers miss a scheduled
appointment.
• Time relates to labour. Resources must track their time accurately and regularly, identifying
when they are either short allotted hours or over the budgeted amount. They should also
notify project managers when they complete their work or will use additional hours to
complete it, exceeding the budget.
• Project accountants break down the project accounting process flow into six main areas:
initiation, budget, administration, allocation, maintenance and analytics and reports.

8. Project Accounting Process Flow Diagram

9.  Initiation: Before starting a project, project managers should decide who is responsible for each task
and how those resources will code their time. They can set up roles in their software using different
levels of permission, as necessary.
 Budget: Project managers should confirm the overall budget is broken down into categories or
groups. A software solution should support defining the budget and offer varying budgets, such as an
initial baseline budget. These budgets should be based on the business’s required reporting.
• Administration: Project accountants process the transactions by recording and processing costs and
revenues as well as tracking financial commitments, running billing and invoicing, recognizing
revenue and generating project profitability reports.

10.  Execution: During this phase, the project managers assign costs, revenues and
measurements to activities. Accountants can base allocations on fixed percentages, specified
factors, percentage and factor combinations, computations or a list of parameters.
 Maintenance: Project staff should have a process to continually review and validate the
data and have a way to identify inconsistencies.
• Analytics and Reports: Regular access to the accounting data on the project helps project
accountants and managers create user-defined reports. They can use this information to
perform analyses and make accurate and timely business decisions.

11. Project Accounting Revenue Recognition Methods
• Accountants choose project accounting revenue recognition methods based on a particular
industry, circumstances of the project and the method’s effect on taxes. Generally accepted
accounting principles (GAAP) require accountants to perform revenue recognition
(acknowledging income) consistently and according to an approved methodology. These
revenue recognition methods differ with each industry and with the circumstances of the
agreed upon deliverables or performance obligation the firm makes with its customer for the
services being delivered.

12. Here’s a list of the different revenue recognition methods businesses can
use and examples of when to use them:
 Sales Basis: Accountants record revenue of the time of sale, sometimes referred to as billed
(time and materials), which occurs when companies exchange goods or services. The
receiver of these may not have made a payment yet. For example, if a customer pre-pays
for a service, the company will record the payment when it delivers the service.
 Installment: This method takes into consideration customers who need to pay in
installments. Therefore, companies record revenue when customers make a payment. For
example, the company records when a customer makes a down payment, hits a milestone or
a specific date. When the customer makes each subsequent payment, the company records
it as revenue.

13.  Percentage of Completion (hours or cost-based): The requirements of this method stipulate
that accountants can only use it if there is a long-term contract in place enforceable by law.
Additionally, the project setup should enable accountants to estimate the percentage of
completion to allocate revenues and expenses. Regardless of the level of completion, service
providers should be able to show they are generating revenue. Typically, construction and
engineering firms use this method.
 Completed Contract: Once a project is complete and the company fulfills its deliverables,
accountants recognize the revenue and expenses. Companies use this method when they
cannot meet the requirements of the percentage of completion method.
• Cost Recoverability: This method records revenues only when accountants account for all
project expenses. Cost recoverability means that accountants understate revenue early in the
project and have overstated it for the company in future years.

14. Project Accounting Benefits
Project accounting, the practice as well as the software, has several benefits. Since you are tracking the
project so comprehensively, you have information about exactly where it is succeeding and where
management needs to make changes. Thus, management has an idea of true project profitability. Other
benefits include:
 Oversight: You can see incremental, day-by-day expenses and revenues, enabling management to
adjust labor, materials, personnel and payments quickly.
 Contract Tracking: Since project accounting tracks everything, billing and contract delivery are exact
and prompt.
 Alignment: Some contracts fall into different departments or fiscal periods. Using project accounting
enables the project accountant to create reports that help track progress through varying departments
and reconcile through different financial periods.
• Predict Growth: Having a detailed handle on projects helps businesses predict their futures.
Companies will understand hiring needs, see their pipelines with more clarity and foresee their cash
flows.