A project that stretches across several months creates a real bookkeeping problem: the invoice hasn't gone out yet, but real costs and real earned value are already sitting there. Work-in-progress accounting is how that gets tracked properly instead of letting the monthly books tell a story that doesn't match what's actually happening in the business.

Why This Matters More Than It Might Seem

A business billing only when a project wraps up can end up with financials that don't reflect reality for months at a time. Spend $50,000 across January, February, and March on a $100,000 project, and if the client isn't invoiced until April, the books can look terrible for three months and then suddenly fantastic in April, even though the business wasn't actually losing money the whole time. WIP accounting exists to close that gap.

The Two Basic Approaches

The percentage-of-completion method recognizes revenue gradually, in proportion to how much of the project is actually done. The completed-contract method does the opposite: nothing gets recognized until the project is fully or substantially complete, then everything hits at once.

Under Canadian ASPE, which method applies isn't simply a matter of how long the contract runs. Percentage-of-completion is the method actually required once the outcome of the contract, meaning the total revenue, the costs to complete, and the stage of completion, can be reasonably estimated. Completed-contract is only appropriate when the work is essentially a single act, or when that outcome genuinely can't be reasonably estimated. Most fixed-price contracts with an experienced contractor meet the reasonably-estimated test, which is why percentage-of-completion ends up being the standard approach in practice, not because of contract length on its own.

How Percentage-of-Completion Actually Works

One common way of measuring progress is the cost-to-cost method: costs incurred so far, divided by total estimated costs for the whole project, gives the percentage complete. Apply that percentage to the total expected contract revenue, and that's the revenue earned to date, whether or not it's actually been invoiced or collected yet.

As an example: a $150,000 project with $80,000 in costs incurred against a total estimated cost of $100,000 is 80% complete. That means $120,000 of revenue has genuinely been earned, even if invoicing and collection are running behind that pace. Revenue recognized doesn't have to equal revenue invoiced, that's the whole point of tracking it this way.

Comparing What's Been Billed to What's Actually Been Earned

Once earned revenue is known, comparing it to what's actually been invoiced reveals over- or under-billing. Billed more than what's been earned, and the business is technically ahead of the work, generally presented as a contract liability, essentially a form of deferred revenue. Billed less than what's been earned, and there's value sitting on the books that hasn't been invoiced yet, generally a contract asset or unbilled receivable. Either way, WIP tracking is what actually reveals this, not the raw invoice total alone.

The Surprise Rule: Expected Losses Get Recognized Immediately, in Full

Here's a detail that catches people off guard: if a project is projected to lose money overall, the entire estimated loss gets recognized right away, in the period it becomes apparent, not spread out gradually as the remaining work happens. Under ASPE, this isn't optional or a matter of judgment, expected losses on a long-term contract get recognized in full immediately once identified, with no deferral permitted. A project that's only 30% complete but already projected to lose $20,000 overall shows that full $20,000 loss now, not a third of it.

A Common Mistake: Treating a Deposit as Revenue

A deposit collected before any work has actually started isn't revenue yet for accounting purposes, it's a liability, generally called unearned revenue or a customer deposit, until the corresponding work is actually performed. But here's the distinction worth understanding: GST/HST timing runs on its own separate track from accounting revenue recognition. GST/HST can become payable on a deposit at the time it's received or invoiced, regardless of whether that amount counts as revenue on the books yet. Accounting revenue and GST/HST timing are genuinely two different questions, and assuming they always move together is an easy way to end up either overstating income or missing a GST/HST obligation that's already arrived.

Does a Small Business Really Need to Do This?

For a business with quick, short jobs that wrap up in days or weeks, formal WIP tracking is often more complexity than it's worth; simple invoicing captures reality closely enough. For a business running longer projects, months rather than days, particularly one dealing with lenders, bonding requirements, or reviewed or audited financial statements, WIP accounting is what keeps monthly financials meaningful instead of lurching between apparent feast and famine that doesn't reflect what's actually happening in the business.

FAQ

Is WIP accounting only relevant to construction businesses? Construction is the most common context, but any business running long, multi-month projects, a design firm, a manufacturer building custom equipment, faces the same basic timing problem and can benefit from the same approach.

Can cash-basis accounting be used instead of tracking WIP? It depends on the business and what the financial statements are actually needed for. A small business using cash-basis figures for its own internal purposes may not need formal WIP accounting, but a business needing reviewed or audited statements, or working with lenders or bonding companies, is much more likely to have a real WIP reporting requirement.

How often should a WIP schedule actually be updated? Monthly is typical for an active business with several ongoing projects, closely tied to the regular month-end close rather than done as a separate, occasional exercise.

What happens if the estimated total cost for a project changes partway through? The percentage-complete calculation gets revised using the updated estimate, which can shift both earned revenue and, if the outlook has worsened, potentially trigger that immediate full-loss recognition described above.

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