What Is Construction in Progress (CIP) in Accounting?

Construction in Progress (CIP) is an accounting concept for organizations undertaking building or development initiatives. It provides a structured way to track financial outlays during the creation of long-term assets. Through CIP accounting, businesses can accurately represent the evolving value of assets under construction within their financial statements. This approach ensures transparency and proper financial oversight for projects that span extended periods.

Understanding Construction in Progress

Construction in Progress (CIP) is an asset account appearing on a company’s balance sheet. It serves to accumulate all costs incurred in building or developing a long-term asset, such as a new facility or a major piece of equipment, until it becomes operational. CIP is a temporary classification, signifying that the asset is not yet complete or ready for its intended use.

The primary purpose of using a CIP account is to capitalize expenditures that will eventually become part of a fixed asset. This prevents these costs from being immediately expensed, which would distort profitability during the construction phase. Maintaining costs in CIP ensures the asset’s value is accurately reflected as it progresses toward completion, providing a true picture of the investment before it generates revenue or is used in operations.

Costs Included in CIP

Costs accumulated and capitalized within the CIP account fall into two categories: direct costs and indirect costs. Direct costs are expenditures specifically and directly tied to the construction project, such as the cost of building materials like concrete, steel, and lumber. They also include the wages paid to construction workers and fees charged by direct contractors involved in the building process.

Indirect costs, while not directly hands-on with the construction, are still necessary to bring the asset to its intended use. These can include professional fees for architects and engineers who design the project. Other indirect costs involve charges for permits and licenses required for the construction, as well as site preparation expenses like excavation. Interest costs incurred on loans specifically taken out to finance the construction during the building period are also capitalized, as are supervision costs for project management.

Accounting for CIP

Recording Construction in Progress involves specific accounting procedures. As expenditures are made for the construction project, they are not immediately treated as expenses that reduce current income. Instead, these costs are debited to the CIP asset account, effectively adding them to the value of the asset being built. This capitalization process reflects that the spending creates an asset with future economic benefits rather than an immediate operating expense.

On the balance sheet, CIP is presented as a non-current asset, typically within the Property, Plant, and Equipment (PP&E) section. It is distinctly identified as “under construction” or “not yet in service” to indicate its incomplete status. For example, when a company pays for materials, the journal entry would involve a debit to the CIP account and a credit to Cash or Accounts Payable, depending on the payment method.

Project Completion and Asset Classification

Once a construction project is complete and the asset is ready for its intended use, the accumulated costs in the CIP account are moved. This reclassification transfers the total capitalized amount out of the temporary CIP account. The CIP account is credited, reducing its balance to zero for that project.

Simultaneously, the total cost is debited to the appropriate fixed asset account, such as “Buildings,” “Machinery,” or “Equipment,” depending on the nature of the completed asset. Only after this transfer is the asset considered “in service” and becomes eligible for depreciation. From this point, the asset’s cost is systematically expensed over its useful life through depreciation calculations, reflecting its consumption as it contributes to operations.