Costs incurred to purchase raw materials in manufacturing or to purchase goods for retail sale in trading businesses have historically been held in an “Inventories” account on the balance sheet rather than recognized as cost to the business immediately.

The idea behind this practice is that those shares have not yet been used for the business purpose, the sale of a higher value end product in the case of manufacturing or the sale of value-added to an end-user in the case of a retail company. Only when finished goods or retail items are physically removed from inventory and sold, generating revenue for the business, are their acquisition costs (along with additional production costs, if any) taken into account. , thus producing the true profit for the business. The application of this accounting technique ensures 2 purposes:

– neither are costs overestimated at the time they are incurred without revenue

– nor are the benefits overestimated at the time of the sale without costs

While that principle is straightforward, when it comes to “things”, it is a much more theoretical matter, when applied to services or immaterial goods that are traded in the creative industry, or indeed in all other service industries. And while the character of the traded value as a service or non-material good can ideally be defined by the underlying contract, for example, “to create, host and maintain a website” as a service or “to deliver a website as is specified in the brief” as an asset*, its treatment from an accounting point of view raises an entirely new separate issue:

If an ad agency requires the example website as “bought” to complete a campaign for their client, how and when should their costs be accounted for in the profit and loss accounts? Ideally, and to report the true profit of the campaign, the cost should only be recognized at the same time that the campaign generates income for the agency. This is where the “Work in Progress” or “WIP” vehicle comes in.

Work in progress is used as a temporary container to collect costs, without those costs being recognized as costs to the business yet. It is typically treated as an asset to the business (similar to the stock account, in regards to materials) and cost items held in this asset are transferred to cost of goods sold accounts upon resale the finished product, possibly with a marking. – service costs. In this way, work in progress in service environments allows unused costs to be accounted for by the business in the same way that a stock or warehouse account would in companies that trade or manufacture items of material. Work-in-progress serves as the “notional store” for non-material goods to achieve the same purpose as a stock account for physical raw materials: calculating and reporting profits or losses as they affect the business.

* see for further explanation of the regulatory background in the UK, Roger Zair “TACKLING ACCOUNTING FOR WORK IN PROGRESS” – Finance Week 22-Jun-2005