Work in progress represents items or projects that have been started by a company but not yet been completed. While this term may be commonly attributed to the production of inventory in the manufacturing environment, it may also represent a capital investment made by a company. Capital investments include the construction of new facilities, setting up various pieces of equipment for producing goods or services, and various other major improvements or additions to business operations. Work in progress is usually recorded as an asset on a company’s balance sheet. Although the asset may not be completed and fully functioning for the company, it is counted as an asset because a capital investment has been made into the new item.
Inventory work in progress represents the current amount of raw materials, direct labor, and manufacturing overhead used to partially create goods in a manufacturing environment. Companies usually report this information separately so they have an accurate picture for unused materials for beginning new manufacturing projects. This information also allows companies to determine how much unfinished work there is at the end of an accounting period. High amounts of unfinished inventories may indicate problems in the manufacturing process. Problems may include equipment failures, too few employees available for producing goods, too much time being spent on producing new inventories or a variety of other operational failures.
Work in progress relating to capital investments for unfinished projects may be found more often in a few specific business industries. These industries include construction, durable goods manufacturers, energy producers, and other large scale production industries. Work in progress occurs more in these industries because they are concerned with the construction or manufacturing of large and significant structures or equipment. Accounting rules often dictate that these industries group their unfinished projects into a work in progress account for ease of reference. Business stakeholders reviewing these company’s financial statements are able determine how many unfinished projects are in the company’s pipeline. Several unfinished projects in the work in progress account may indicate copious amounts of future income upon completion of each project placed into full time service or sold to customers.
Companies working in these large scale production industries may also be limited on the amount of income they can recognize regarding work in progress projects. Accounting rules usually require companies to only recognize income based on the percentage of completion for each unfinished project. These limitations usually focus on construction and durable goods manufacturers who build major projects for clients. As the project increases in its completion percentage, companies may recognize more income for each of these projects on their financial statements.