Journal Entries for Construction in Progress

Quick Answer

Construction in progress (CIP) — sometimes called construction in progress (CIP) or capital work in progress (CWIP) — is an asset account on the balance sheet that accumulates the costs of long-term assets being built or developed. Costs are debited to the CIP account as they are incurred. Once the asset is placed in service, the accumulated CIP balance is reclassified to the appropriate fixed asset category and depreciation begins. CIP assets are not depreciated while under construction.

What Is Construction in Progress?

Construction in progress is a temporary balance sheet account used to track the cost of constructing or acquiring a long-term asset before it is ready for its intended use. Common examples include:

• Building a new factory, warehouse, or office
• Constructing a specialized production line or equipment
• Developing infrastructure such as roads or parking lots
• Installing major equipment that requires site preparation

Under both US GAAP (ASC 360) and IFRS (IAS 16), costs directly attributable to bringing an asset to its working condition must be capitalized — not expensed immediately. The CIP account serves as the holding place for those costs during the construction period.

What Costs Can Be Capitalized in CIP?

Only costs that are directly attributable to the construction and necessary to bring the asset to its intended use qualify for capitalization. Eligible costs include:

• Raw materials and components used in construction
• Direct labor costs of workers engaged in the project
• Architect, engineering, and design fees
• Permits and licensing fees
• Interest on loans specifically taken to finance the project (capitalized interest under ASC 835)
• Site preparation and excavation costs
• Overhead directly attributable to the construction activity

General and administrative expenses, training costs, and costs incurred after the asset is ready for use are not capitalized and should be expensed as incurred.

Journal Entries for Construction in Progress

1. Recording Materials Used in Construction

When materials are purchased and used directly in the construction project, they are debited to the CIP account rather than to an expense account.

This entry captures the cost of raw materials consumed in the building process. If materials are purchased on credit from accounts payable, the credit would be to Accounts Payable instead.

2. Recording Direct Labor Costs

Labor costs for employees directly working on the construction project are capitalized to CIP.

Only wages for workers physically constructing the asset should be capitalized. Administrative staff and general overhead are expensed in the period incurred.

3. Recording Contractor and Professional Fees

Payments to external contractors, architects, and engineers are part of the capitalized cost.

These fees are capitalized because they are directly attributable to bringing the asset to its working condition.

4. Capitalizing Interest During Construction

Under ASC 835-20, interest on debt specifically incurred to finance the construction of a qualifying asset must be capitalized during the construction period. This avoids understating the asset's cost on the balance sheet.

Once the asset is substantially complete and ready for use, interest capitalization stops and any further interest is expensed.

5. Recording Insurance and Permit Costs

Construction-specific insurance policies and building permits are capitalized costs.

6. Reclassifying CIP to a Fixed Asset

When the construction project is complete and the asset is placed in service, the entire CIP balance is reclassified to the appropriate fixed asset account. This is the most important CIP journal entry.

After reclassification, the asset begins to depreciate over its estimated useful life. The CIP account should have a zero balance once the transfer is complete.

Partial Completion and Progress Payments

For large construction projects, progress billings are common. The contractor invoices the company at milestones or at regular intervals. Each progress payment is recorded as an addition to CIP:

This process continues until the project reaches completion. It is important to track CIP by individual project so that costs are not commingled between different construction activities.

CIP on the Balance Sheet

Construction in progress appears under non-current assets on the balance sheet, typically grouped with property, plant, and equipment. Because CIP assets are not yet in service, they are not depreciated. This is a key distinction from completed fixed assets.

Account	Classification	Depreciable?
Construction in Progress	Non-current asset (PPE section)	No
Building	Non-current asset (PPE section)	Yes
Equipment	Non-current asset (PPE section)	Yes

Investors and auditors closely monitor the CIP account. An unusually large or aging CIP balance may indicate delays, cost overruns, or that an asset should have already been reclassified and depreciation started.

Common Mistakes to Avoid

• Failing to reclassify CIP — Leaving costs in CIP after the asset is placed in service delays depreciation and overstates net income.
• Capitalizing ineligible costs — General overhead, training, and marketing costs should not be included in CIP.
• Not capitalizing eligible interest — Under ASC 835, interest on qualifying assets must be capitalized, not expensed.
• Mixing multiple projects in one CIP account — Each project should be tracked separately for accurate cost accumulation and timely reclassification.
• Forgetting to start depreciation — The month after the asset is placed in service, depreciation must begin.

CIP vs. Repairs and Maintenance

A common question is whether a project should be capitalized as CIP or expensed as repairs and maintenance. The general rule:

• Capitalize if the expenditure extends the asset's useful life, increases its capacity, or improves its efficiency beyond the original design.
• Expense if the expenditure merely maintains the asset in its normal operating condition.

When in doubt, consult ASC 360-10 or IAS 16 for guidance on subsequent expenditures.

Key Takeaways

• CIP is a temporary holding account for costs of constructing a long-term asset.
• Only directly attributable costs — materials, labor, professional fees, permits, and construction-period interest — are capitalized.
• CIP assets are not depreciated while under construction.
• Upon completion, the full CIP balance transfers to the fixed asset account and depreciation begins.
• Proper tracking by project and timely reclassification are critical for accurate financial reporting.