Understanding and analyzing financial statements are the bane of most entrepreneurs and business owners. They often dread anything that has to do with the financial aspects of their business. Without a financial or accounting background, it would be hard to interpret the numbers written on your financial reports, thus making it challenging to come up with the right decisions for your venture. In this article, we will be talking about what is WIP in accounting?
Opting to put it in the professional hands of an accountant or a financial expert may be a better choice. However, the best option would be for an owner to have a firm grasp of his/her firm. Whether it is a small side hustle or an expanding enterprise, it is crucial to have a solid idea of all of your business processes and operations.
Knowing the financial aspects of your company lets you know its financial standpoint in the industry. A keen awareness of it will help you improve your business performance, manage your finances, and grow your venture. One way to do this is to get acquainted with your financial statement and its contents.
A financial statement comprises several major finance reports, one of which is a balance sheet. Diving inside the balance sheet, you will see a specific section there labelled WIP. So, what is it?
Understanding the WIP In Your Balance Sheet
WIP or Work-in-Progress is a part of the inventory account under the Assets section of your company’s balance sheet. As the name implies, WIP is a term that pertains to partially finished goods during a manufacturing process; these are materials that are still in the production process, awaiting completion. It refers to labour, raw materials, and processing costs used to build a product that is still undergoing production, regardless of the degree.
Work-in-Progress is a concept that needs to be reported for it describes the manufacturing costs in the different areas of the production process. Also, WIP is accounted for under the current assets, together with Raw Material and Finished Goods inventory. These inventories allow you to keep track of the costs incurred at the various stages of the manufacturing process at the end of the accounting period.
For example, let’s suppose you run a clothing manufacturing company. Your raw materials would be the fabric used, while labour costs are incurred to operate sewing machines and cutting equipment. During this stage, all expenses go under Work-in-Progress. When the shirts (product) are finished, you will then move the costs from WIP to the finished goods inventory.
Why Is WIP Important?
Your Works-in-Progress are directly proportional to the production process of your firm. Understanding it is a great way to know your business’s production capacity and progress. For businesses, it is vital to keep track and manage their WIP for these reasons:
1. A Low WIP Inventory Means Low Costs
Unlike with Inventory accounts, companies should minimize their WIP levels. A large number of WIP means added costs to the manufacturing process. The reason for this is that incomplete goods require warehousing and other utilities to preserve their state. You need storage facilities, extra manpower, electricity, and other utilities to maintain your product’s optimal condition.
2. A High WIP Means Deterred Work
A large number of WIP in the assembly line means prolonged or lagged workflow that can potentially result in backlogs, or worst, a halt in the production process. Slow production rates prevent your company from meeting your consumer’s high demands, which can cause financial problems in the future.
Putting the time to study your financial statements and the different accounts it encompasses, such as a WIP inventory, makes a big difference to your business. It helps you make sound business decisions that will ultimately lead to the success of your organization.
Annette Ferguson – Chartered Accountant and Certified Profit First Professional – can help you unlock financial strategies to improve the profitability of your business amidst an economic crisis.
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