What is project accounting? (With principles and use)
By Indeed Editorial Team
Published 10 May 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
For businesses that operate on a project-by-project basis, picking an accounting method that reflects that workflow is key to success. Project accounting is a tool often used in construction and similar fields where long-term projects dictate costs and work. Understanding how this form of accounting works and how it differs from traditional accounting is a strong foundation if you're thinking of a new career path involving project finances. In this article, we look at what project accounting is, why it's important and some of the key principles involved in using this type of accounting.
What is project accounting?
Project accounting is the practice of tracking costs, expenses and cash flow across the lifespan of a project. Many projects fall beyond the scope of a year or may start in the middle of the fiscal year. This difference makes it essential to accurately report project finances across the entire project's lifespan instead of sticking to expenses incurred in a specific financial year. Project accountants typically work alongside standard accountants for businesses that operate through projects, as it's still a requirement to submit annual tax returns for each fiscal year.
It's an internal practice used by businesses to track money spent over time, understand how to allocate resources and ensure payments happen on time. The construction industry is a common area where this form of accounting helps to keep track of projects that may span several years. For example, accounting for a construction project may include tracking building material costs, wages, and equipment hire over the three-year length of a project.
Why is project accounting important?
Accounting is crucial as it allows businesses the insight and knowledge to understand their finances and allocate resources throughout the length of a project. The accounting process is reactive in tracking and listing existing expenses and proactive in planning and determining the future material, time and equipment costs of an ongoing project. Project accountants provide valuable insight to project managers, help cost jobs for bidding and provide real-time updates on the progress and profitability of work.
Principles of project accounting
Accounting includes multiple different principles. These principles provide further information, insight and calculations to support the creation and continuation of projects. For example, the matching principle may help project accountants assign expenses to specific parts of a project to offer an accurate idea of which parts are most costly. Here are some of the principles of accounting you may use:
The cost principle is the process of recording the costs of a project at their original value. This value is how much a piece of machinery, equipment or materials cost to buy instead of the market value they may hold. For example, if you buy a piece of equipment for £5,000 at a discount but the machinery's typical value is £6,000, the cost is recorded as the amount you paid.
The matching principle is the practice of matching expenses to specific points and milestones in the project process. This process allows expenses to be fairly distributed and assigned, providing insight into the costs incurred at particular stages in a project. For example, assigning the cost of building materials to the stage where those materials have use in construction can provide project managers with insight into what a specific part of a larger construction project cost.
The consolidation principle involves combining related work and processes in a project into a single group to give an overall, consistent cost figure. Consolidation typically involves using a process to determine the revenue and costs of the project as a whole and working to consolidate all of the project's relevant financial activities into one account or document. For example, a project accountant may consolidate all hire and labour costs into one account for an overview of the total cost.
Full disclosure principle
The full disclosure principle is a comprehensive method of recording and displaying all financial costs incurred and significant events in the form of financial statements. By recording everything clearly, there's greater transparency and accountability for stakeholders and managers involved in spending or dividing a project budget. For example, a project accountant may produce a fill disclosure statement of all significant costs incurred in a project for all project stakeholders.
The prudence principle is the process of determining the revenue and expenses of a project or project area based on a manager's estimate or advice. This financial information then informs the budget or predicted costs of an ongoing project. For example, the prudence principle is helpful at the start of a project to provide an idea of revenue and expenses in the future, based on the expert insight of management or professionals.
The liability principle involves looking at and listing any future costs of penalties that may apply to a project, providing protection and information on liabilities that a company may face. This financial statement typically includes any contract penalties or damages that may apply for a failed project or breach of contract. For example, a project accountant may provide a document listing all possible costs that could apply if the company fails to complete a project within a specified contract time frame.
Control principle is the use of specific processes and procedures put in place to ensure financial activities are appropriately regulated. This principle provides managers with the means to track project performance accurately with no financial information or data issues. For example, a control principle that a project accountant may use is utilising the correct software and checking all figures and information on entry.
Resource allocation principle
The resource allocation principle refers to the practice of allocating resources to more than one project or more than one area of a large project. In some cases, managers may allocate the same volume of resources to multiple projects based on their risk and benefit, preventing the requirement for financial allocation. For example, a manager may assign machinery resources to multiple projects at once.
When is this accounting used?
Accounting is a valuable part of measuring the financial success, ongoing costs and potential liabilities of any project. Most project accountants work with clients or in industries where projects are the most common workflow, such as in contracting industries. Here are some of the instances of how accounting supports projects:
projecting or recording the costs incurred for labour, machinery and other activity
tracking the revenue and expenses for whole projects
recording future costs that are possible if a project fails or misses deadlines
documenting the date a project starts from contract signing
identifying the costs involved in different project phases
detailing revenue from contracts and sales agreements
Project accounting vs. general accounting
Project accounting and general accounting both utilise financial expertise and attention to detail to achieve a range of outcomes. While general accounting has functionality in every area of business, project accounting is a specialised solution utilised by businesses that work on a project basis. Some of the key differences between general and project accounting include:
Usage and purpose
General accounting supports many different activities in a business, including filing tax returns, recording expenses and creating financial reports and statements for various purposes. Project accounting is integral for individual projects, and the functions and requirements involved in project finances. Project accounting may work alongside other accounting as part of a tax return, but general accounting gathers all additional financial information to complete the necessary tax filing.
Revenue and expense recordings
General accounting focuses on expenses that have already happened and money that has already left accounts to track past spending. Project accounting focuses on business costs throughout the length of a project, which includes tracking future projected costs and examining existing expenses already covered in a specific project. Businesses use general accounting for an accurate recording of when they incurred expenses to the day, while project accounting allows for easy correlation between milestones and costs.
General accounting uses the fiscal year as the start and endpoints for financial reporting, tax returns and other activities. Project accounting doesn't adhere to a yearly cycle and instead follows the length of a project from start to finish. For example, a project starting in March one year may end in April in three years, requiring the creation of reports and financial documentation throughout the time that project is active.
Adaptability and involvement
General accounting is a regular, consistent requirement for businesses that don't often change or require adaptation. Project accounting may have to meet projects' demands and evolving requirements, requiring greater flexibility and adaptability over time. For example, frequent reviews for projects may lead to changes in projected budgets or planned equipment, which a project accountant would adjust in their reports and documentation to suit these changes.
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