What is Capital Work in Progress?
Capital work-in-progress or CWIP is one of the most important components of the non-current assets of an entity. Capital work-in-progress represents the cost incurred on under-construction fixed assets like building, machinery, etc. to the date of preparation of the balance sheet. The cost that is incurred on these assets cannot be recognized as fixed assets because they are not operational. CWIP can also be explained as the work that is not yet completed but has already been paid for.
The concept of CWIP is most relevant for organizations with under-construction immovable assets, like buildings or plants & machinery, because they take more extended periods for construction. Therefore, all costs incurred on assets under construction are recorded as CWIP and transferred to the “fixed assets account” once completed and ready for use.
Accounting Treatment of CWIP
The capital work-in-progress requires proper accounting treatment for accurate presentation on the balance sheet. The entity prepares a separate “capital work in progress account” and represents it on the balance sheet under fixed assets. All the costs incurred on an under-construction asset up to the date of the balance sheet are transferred to that account.
A capital work-in-progress account (CWIP Account) contains all expenses incurred on the asset until it is completed and converted into working condition. All these expenses incurred will become part of the cost of that asset. Once the asset is completed and ready to use, the balance is transferred to the fixed assets account and the CWIP account is removed from the balance sheet.
Example of Accounting Treatment
Let’s assume that a company is constructing a building for its new office. The company prepares its balance sheet at the end of each financial year, that is, 31st March. As of 31st March, the building is still under construction. The following are the costs that company has incurred on the building as of 31st March:
- Construction material = $250,000
- Labour cost = $120,000
- Architect fees = $40,000
- Contractor fees = $80,000
The total payment made for the construction of the building is $490,000. The CWIP Account will be debited by $490,000 against the cost incurred on the building. The journal entry for the same would be:
| Particulars | Debit Amount ($) | Credit Amount ($) |
| CWIP Account Dr. | 490,000 | |
| To construction materials | 250,000 | |
| To labor cost | 120,000 | |
| To architect fees | 40,000 | |
| To contractor fees | 80,000 |
After the completion of construction, we credit the CWIP account and debit the fixed assets account. Therefore, removing the CWIP account from the balance sheet, and transferring its balance to the fixed assets account. The journal entry for the transfer of the CWIP account will be:
| Particulars | Debit Amount ($) | Credit Amount ($) |
| Fixed Assets account Dr. | 490,000 | |
| To CWIP account | 490,000 |
