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I really want to understand WIP financial accounting more

I really want to understand WIP financial...

Hi all,

As the title says, I want to understand how to account for WIP and stock a lot better then I currently do. I studied it every so slightly at AAT about 3 years a go but have forgotten much of it.

The old google throws up too many American sites that seem useless.

Can anyone recommend any decent study texts / guides on this topic?




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01st Feb 2012 15:29


I would suggest you cannot do anything better than read the relevant Accounting Standard, FRSSE (smaller companies)/SSAP 2 (medium and large companies)/IFRS (where adopted). After all they are the foundations we work upon in Accounting. You can find this information on the Accounting Standard Board's website.

A general run-down of how WIP/Stock works.

Valuations are always on a "Lower of Cost or Net Realisable Value" basis. In most cases Cost will be the lower. Simply put, Net Realisable Value is what you could sell it for. E.g. Scrap.You can absorb Direct Costs into Stock figures. E.g. in a manufacturing business you might absorb Direct Wages based on hours per unit for however many units in stock. I am not sure about Overheads. Check the standards.

The core principle behind it all is applying the accruals concept. It would be unreasonable  and skew the understanding of the accounts to recognise costs in one period and the matching revenue in another.

Similar applies to Work in Progress. This is largely an issue in service orientated firms, such as Accountants. e.g. all time recorded and not billed is an indicator of WIP. But, as this is stated (likely) at selling price, you cannot use that figure. You would have to identify the underlying costs from wages.

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