What Is Project Accounting? A Complete Guide
Not all projects are created equal.
When you’re offered commissioned work, it's difficult to see it as anything other than a good thing for you and your business. However, there are times when after all is said and done, the project was not worth the time nor the effort.
This may be due to the fact that the project was too difficult or unfulfilling. But often a project can actually cost more to complete than the amount you’re paid to do it.
That’s where project accounting comes in. But what exactly is project accounting? We’ll take you through the ins and outs in our complete guide of project accounting.
Here’s What We’ll Cover:
What Is Project Accounting?
Project accounting is an accounting process used by businesses. It tracks the cost and financial benefits associated with a project or task. It is used to get a proper level of understanding that project costs are on track during the lifecycle of the project.
The process contributes to a sustainable use of resources in projects and helps to keep losses at bay.
One of the main aims of project accounting is to meet the needs and expectations of a project delivery. It enables you to do this whilst being able to pay attention to all of its financial components. This would include things such as:
- The budget of projects
- An estimate of costs
- An estimate of expenses
- All of the billable elements
- All of the non-billable elements
- Everything that falls within the starting and closing stages of the project.
Upper management or business owners will use project accounting to get better visibility across all of the projects the business undertakes. This is to see if they are delivering value to the company or if the process is detrimental.
What Are the Best Project Accounting Principles to Follow?
When going through the process of project accounting, there are a number of principles that it is good practise to follow. Some of these principles include:
- Identify KPIs: You should identify a number of key performance indicators within your projects. This could be things like schedule performance and cost performance. This can help you to ensure that the more critical aspects of your projects are on track.
- Run Regular Reports: Project accounting is used to track progress and budgetary data. Therefore it's important to run regular financial reporting. This is to effectively monitor the project status and any potential issues.
- Use a Separate Account: Project accounting shouldn’t be joined in with your everyday accounting processes. This is because there is much more detail involved and the information can get confused.
- Make Use of Budget Forecasting: Before starting a project, you should run a complete budget forecast. This is the best use of project accounting and budgeting as it will give you a starting point to work from. It also gives you a basis for measuring progress, identifying any red flags and determining what you would consider success and failure to be.
- Establish Cost Codes: Cost codes are used to identify, track and compare expenses. This is an essential part of project accounting as it allows you to manage certain types of transactions. It also allows you to easily perform cost comparison analysis between various projects.
What Is the Difference Between Project Accounting and General Financial Accounting?
The main difference that you will see between project based accounting and day to day general finance accounting is the transactions. Project accounting focuses only on transactions that apply to that specific project. Whereas general accounting focuses on any number of transactions that pass through the company.
However, there are still other differences between the two accounting processes. Some of these differences include:
General accounting tracks transactions over an entire financial month. Whereas project accounting tracks from the start of a project through to the end. So while general accounting is exactly a month, a project can last less time or much more than a month.
In general accounting costs are broken down into large categories. For example you’ll see overarching categories such as accounts payable and accounts receivable. But project accounting allows you to break down costs into much smaller, more specific parts. This would be costs associated with certain project tasks.
General accounting consists of two methodologies that must be chosen between. These are cost accounting and accrual accounting.
When you’re looking at project-based accounting, the methodology that you choose doesn’t affect the process.
All aspects that are involved in the day-to-day running of the business are considered in general accounting. But when it comes to project accounting, only the factors associated with each specific deliverable and project are considered.
When Should You Use Project Accounting?
There are a number of circumstances when you should utilise the benefits of project accounting. Whether you’re looking at an internal or an external project, you might use project accounting when:
- You have a regular or one-off project assigned to you by a client or customer
- You are creating a new product
- You are planning a new service to offer
- You are taking on new types of projects that fall outside your normal area of expertise
- You are carrying out a comparative analysis between different projects
- You are trying to determine how much money should be spent across certain projects
When it comes to industries, project accounting is most commonly used in construction and engineering firms. This is because this type of work is commonly based on contracts for unique projects.
However, using a project-based accounting system can be beneficial to a variety of businesses in a wide range of industries.
What Are the Benefits of Project Accounting?
Implementing project accounting into your workflow has a number of benefits. Some of the key ones are as follows:
- Allows you to establish a reasonable and achievable budget for a project
- Improves resource allocation and management
- Provides important insights to project teams and project managers
- Helps to gather valuable information and insight on making future project bids
- Provides real time updates on progress and profitability
- Provides customers with accurate data for billing and staying up to date on progress
- Helps to determine scope and pricing for similar projects
- Improves the business’s overall financial management
Project accounting is a great way for businesses of all sizes to keep a track of the profitability of their projects.
It’s a perfect metric for project managers to do a financial analysis and ensure that they are making the most out of their time and resources.
Using project accounting software such as FreshBooks allows you to automate this process. Digitizing your accounts enables you to have a seamless and streamlined accounting experience.
Are you looking for more business advice on everything from starting a new business to new business practices?
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