Is WIP a Revenue or Expense?
Work-in-Progress (WIP) is neither revenue nor an expense in itself; it is a liability generated as a result of unsold products or incomplete services. In that context, instead of being a current liability, this account is an inventory account that reflects the value of the raw materials, work in process, or still-to-be finished goods, products, or services. WIP, also known as the Work in Progress asset, accounts for the value of the work completed but yet to be finished and is included on the balance sheet. Here’s a breakdown of how WIP fits into the accounting categories:
1. Assets on the Balance Sheet: The firm records WIP as a current asset on the books. It covers costs alongside the production process but is absent from goods, which are finished and transferred to stock inventory.
2. Temporary Holding Account: WIP is a temporary budgetary account that bears indirect amounts of excess overhead in connection with direct materials, direct labor, and manufacturing overhead. These expenses, however, are capitalized, being transported to the WIP count until the point in time when the product is ultimately finished.
3. Transfer to Cost of Goods Sold (COGS): Next, the costs that have been collected in the WIP (Work in Progress) account are transferred to the COGS (Cost of Goods Sold) account with the completion of the production process. The exchange occurs after the wholesalers take the goods into custody.
4. Impact on the Income Statement: Despite WIP not being sourced on the income statement, its impact is still maintained through the costs transferred to COGS. The prices are now treated as expenses in COGS and thus are deducted from the gross profit and subsequently from the operating profit.