Costs incurred to purchase raw materials in manufacturing or to purchase goods for retail sale in commercial businesses are historically held in an “Inventory” account on the balance sheet rather than recognized as costs to the business immediately.

The idea behind this practice is that those holdings have not yet been used for the purpose of the business, the sale of a higher-value end product in the case of manufacturing, or the sale of added value to a non-end-user in the case of manufacturing. of a retail company. Only when finished goods or retail items are physically removed from inventory and sold, generating income for the business, are their acquisition costs (along with additional production costs, if any) taken into account. , thus producing the true profit for the business. The application of this accounting technique ensures 2 purposes:

– costs are also not overestimated at the time of incurring them without income
– nor are the profits overstated at the time of sale without costs

While that principle is simple, when it comes to “things”, it is a much more theoretical question, when it is applied to services or immaterial goods that are traded in the creative industry or, indeed, in all other service industries. And while the character of the value traded as a service or non-material good may ideally be defined by the underlying contract, for example “to create, host and maintain a website” as a service or “to deliver a website as is specified in the brief” as a good*, its treatment from an accounting point of view raises a completely new separate question:

If an advertising agency requires the example website as “purchased” to complete a campaign for its client, how and when should its costs be accounted for in the profit and loss accounts? Ideally, and in order to report the true utility of the campaign, the cost should only be recognized at the same time that the campaign generates income for the agency. This is where the “Work in Progress” or “WIP” vehicle comes in.

Work in progress is used as a temporary container to collect costs, without those costs being recognized as costs to the business yet. It is usually treated as an asset to the business (similar to a stock account, as far as materials are concerned), and cost items held in this asset are transferred to cost of goods sold accounts upon reselling. the finished product, possibly with a marking. – service costs. In this way, work in progress in service environments allows unused costs to be accounted for for the business in the same way that a stock or warehouse account would be in companies that trade or manufacture material items. Work in progress serves as the “notional store” for nonmaterial goods to accomplish the same purpose as a stock account for physical commodities: calculating and reporting profits or losses as they affect the business.

* see with further explanation on the regulatory background in the UK, Roger Zair “TACKLING ACCOUNTING FOR WORK IN PROGRESS” – Finance Week 22-Jun-2005

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