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OPINION: Why I Disagree with Work-in-Process (WIP) Accounting



Officially, work-in-process (WIP) labor is considered an inventory of labor purchased from technicians. Inventories are considered assets and carry a normal debit balance.

The problem is that repair orders are typically posted before the technicians are paid.  For example, when a technician completes his work and the RO is closed, it usually gets posted within a day or two. However, the technician does not get paid until the end of the pay period, a week or two later. This leaves a credit balance in the WIP account* for that time period. Credit balances in inventory accounts are not usually accepted by the manufacturer or by Generally Accepted Accounting Principles.

So, what is the alternative? I suggest posting the credit from the RO directly to a payroll payable account, bypassing the WIP account. The payroll process will then debit payroll payable and clear out the balance. Simple, accurate, and no need for extra posting and gyrations at month end.

But whether you see work in process as an inventory asset or a liability, you MUST have this account on a schedule and control it by the repair order number. Setting up a schedule will require a bit of reconciliation but errors and omissions will show up quickly and will help keep your books tidy.

Agree or disagree? Share your opinion in the comments:

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