The costs incurred to purchase raw materials in manufacturing or to purchase goods for retail sale in trading companies are historically held in a “Stock” account on the balance sheet rather than being recognized as costs to the company immediately.
The idea behind this practice is that those acquisitions have not yet been used for the business purpose, the sale of a higher value end product in the case of manufacturing or the sale of added value to a company. -end user in the case of a retail company. Only when finished products or retail products are physically taken out of stock and sold, generating income for the business, are their acquisition costs (along with additional production costs, if any) taken into account, producing thus the real profit for the business. deal. The application of this technical accounting ensures 2 purposes:
– Nor are costs overvalued when incurred without income
– profits are not overvalued at the time of the free sale
While that principle is straightforward, when it comes to “things,” it is a much more theoretical question when applied to non-material goods or services that are traded in the creative industry, or indeed all other service industries. . And while the character of the value traded as a service or non-material good can ideally be defined by the underlying contract, for example, “to create, host and maintain a website” as a service or “to deliver a website as is. specifies in the brief “as a good *, its treatment from an accounting point of view raises an entirely new separate question:
If the website in the example is required by an advertising agency as “bought” to complete a campaign for its client, how and when should its costs be recorded in the profit and loss accounts? Ideally, and to report the true benefit of the campaign, the cost should only be recognized at the same time when the campaign generates revenue for the agency. This is where the “Work in Progress” or “WIP” vehicle comes in.
Work in progress is used as a temporary container for collecting costs, without those costs being recognized as costs to the company yet. It is generally treated as an asset for the company (similar to the inventory account, in regards to materials) and the cost items held in this asset are transferred to the cost of sales accounts at the time of resell the entire product, possibly marked. – service costs. In this way, work-in-progress in service environments enables unused costs to be accounted for for the business in the same way that a stock or warehouse account would for companies that trade or manufacture material items. Work in progress serves as the “theoretical store” for non-material goods to achieve the same purpose that a stock account would have for physical raw materials: to calculate and report profits or losses as they affect the business.
* see with more explanations on the regulatory background in the UK, Roger Zair “FACING THE ACCOUNTING OF JOB IN PROGRESS” – Finance Week 22-Jun-2005
