When and how do you accrue job costs?

Quick lesson!

If you've incurred costs on a project but haven't recorded the costs in your accounting system yet because you haven't received the invoice, you should technically accrue the costs. Accruals will function as a placeholder until you receive the invoice. Once you receive the invoice and record it, "reverse" the accrual so you're not doubled up on liabilities and costs.

For example, if you are anticipating an invoice of approximately $100,000, you would record the following entry:

To accrue job costs:

Debit/(Credit)

Accrued liabilities $(100,000) [liability on balance sheet]

Accrued job costs 100,000 [cost of revenues on income statement]

When you receive the actual invoice, you would record it through your accounting software's accounts payable module.

To reverse accrued job costs after recording actual invoice:

Debit/(Credit)

Accrued liabilities $100,000 [liability on balance sheet]

Accrued job costs (100,000) [cost of revenues on income statement]

The net affect of these entries is zero for both liabilities and costs.

I would suggest tracking your accruals in a separate spreadsheet and not messing with the project subledgers because they can be finicky at times. Document the project, vendor, date, and amount accrued. The total should reconcile to your trial balance.

I know a lot of this is easier said than done considering how many projects may be in progress at the time of building your WIP. You will likely have to collaborate with your project managers to determine when an accrual may be necessary.

Why does any of this matter? We don't want to skew our over/underbillings. I've encountered several scenarios where clients were significantly overbilled on their unadjusted WIPs because they billed project owners for work performed but did not record the associated costs until the following period. In the end, they had to accrue the costs which reduced overbillings to a more reasonable amount.

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