When they're no longer "estimates"
It's year end 12/31/X6 and you have a list of projects in progress. Fast forward a month or two into the new year and some of those jobs have been completed.
Example time!
On your 12/31/X6 WIP you have a contract amount of $700,000 and total estimated cost of $600,000 for Job #1.
12/31/X6 WIP:
It's 2/15/X7 and I've got a copy of your 12/31/X6 WIP and notice that job #1 was 75% complete, so I ask how well that job is progressing or if it's complete. You mention that it wrapped up the previous week. Great! What were the final numbers, aka, what was the subsequent activity?
When a job is completed subsequent to year end, hind sight is 20-20. We now know the total contract amount and cost of the project in its entirety. How? We take the costs and billings to date through 12/31/X6 and add the subsequent activity through the date the job was completed (1/1/X7 to 2/9/X7). Those estimates at 12/31/X6 are no longer "estimates".
So we pull up subsequent activity and note total billings of $295,000 and costs of $178,000. Add those amounts to our billings and costs through 12/31/X6 and we get total billings of $695,000 and costs of $628,000. Now we have our contract totals that we should be using for the 12/31/X6 WIP.
Contract totals:
Updated 12/31/X6 WIP:
It would be misleading to leave the contract estimates as they were originally on the 12/31/X6 WIP. Just because those were the estimates at that time doesn't mean we should still be using them. Time passes and we learn more about the project and changes in circumstances. They're estimates because we don't "know" the final numbers yet, but when we do "know" the numbers based on subsequent activity, we should adjust year end estimates to reflect that activity.
Thanks!
Ara
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