Project accounting is one type of accounting that organizations use when launching special projects. This type of accounting differs from general accounting in its general usage and in how you record expenses and revenue. Learning about it may allow you to use its principles when working on various projects.
In this article, we define project accounting, explain why it’s important, describe its various principles, share when you can use it and provide a list of differences between general accounting and project accounting.
What is project accounting?
Project accounting is the accurate tracking of costs incurred through the lifespan of a project. Such costs may include materials, labor and capital equipment. They might occur at any point during the project management cycle.
The costs that this method tracks might depend on the industry and on the type of project being completed. For example, project accounting during a construction project might involve tracking the cost of all building materials, employee wages and permit costs.
Why is project accounting important?
It’s important to track the amount of money spent over time because it may help a project owner allocate resources across different projects. To manage a project effectively, especially one with multiple phases, it’s helpful to understand how much a business spends on each phase. This can allow managers to plan and identify the resources needed for each phase before moving on to another stage of development.
Benefits of project accounting
Here are some key benefits of using project accounting:
Budgetary compliance
Using formal accounting practices to track the amount of resources a project takes can ensure that the project manager keeps within an accepted budget. A single department might split funds between multiple projects, so staying within budget ensures that the department has the funding to continue with regular business operations. A project manager might perform regular accounting reviews of each project phase to assess whether the budget is sufficient.
Identification of cost-saving measures
Thorough cost accounting can also help project managers identify areas where they can save money during the project management process. Often, companies and departments launch similar projects year after year, so learning from each project can benefit the company in the long term.
For example, a project manager for a software development team might identify several areas where the team can save money during the production of a new program. By sharing this information with the company’s leadership team, the project manager can help the company save money on the next project.
Better client relations
Project accounting can be particularly helpful when a company is completing a project for a specific client. For example, a hospital’s board of directors might contract with an architecture firm to design a new wing for the hospital.
Because the client is paying for the entire project, it’s important that the project’s accounting team accurately predicts the cost of each design phase. This accurate record-keeping can build client confidence in the project manager.
Principles of project accounting
Project accounting shares many of the same basic principles as general accounting, but the principles are customized to fit the limited scope of project accounting. Here’s a list of the principles that govern project accounting:
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Cost principle: The cost principle states that you record project costs at their original value rather than estimating their market value. For example, if you buy a piece of machinery for $1,000, but its market value is $2,000, you still record the cost as $1,000.
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Matching principle: The matching principle states that you may assign expenses incurred during the production process to the period in which your team incurred them. Therefore, revenues and expenses match the appropriate costs and activities over time.
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Consolidation principle: Per this principle, managers can group related work performed on a project over time to make the overall cost of the project consistent. You can do this by following a systematic process for determining revenue and costs and working with other parties to consolidate the financial activities of a project into a single account.
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Full disclosure principle: The full disclosure principle requires you to record all significant events in the financial statements. This allows for increased transparency, which can lead to better accountability among project stakeholders.
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Prudence principle: The prudence principle states that you determine the amount of revenue and expenses using the management team’s best estimate of how much revenue or cost may actually happen for a project.
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Liability principle: The liability principle requires that you recognize all costs that relate to the future obligations of the project, which include any contract penalties and liquidated damages, which are costs associated with breaching a contract.
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Control principle: The control principle states that you employ procedures and processes to ensure regulation in the monitoring of financial activities. The control principle allows managers to track the actual performance of a project accurately after they make adjustments for nonrecurring events.
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Resource allocation principle: The resource allocation principle states that you may allocate resources to multiple projects. This means that managers may allocate the same amount of resources to different projects, depending on their financial benefit and risk, without having to reallocate money again in subsequent periods of time.
When to use project accounting
Here’s a list of instances in which you may use project accounting:
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Recording or projecting costs incurred based on direct labor hours, machine hours or other activities
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Tracking actual expenses and revenues for all projects
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Recording costs you may incur in the future based on contracted delivery schedules or completion dates
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Recording the date you signed a legal agreement with a customer for your team to perform a project
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Identifying costs based on the specific phases of a project from the beginning to the end
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Recording revenues from sales agreements or contracts from clients for projects as you earn them
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