Project accounting is used to determine the financial performance of specific projects within an organisation. It is the process of creating financial reports on a project by project basis. It is also used to ascertain which projects are adding value to the organisation and which are those that can be discontinued. It is a management tool which is used to pin-point the performance of each project. The guidelines to project accounting is outlined in this article.
Project accounting financial reports
Project accounting is implemented through the creation of the financial reports of projects namely, the trading account, the profit and loss account, the balance sheet, the financial budgets and the cash-flow statements.
Trading an profit and loss account and the balance sheet
This shows the gross profit and the net profit generated from each project as well as the budgeted profit. The balance sheet will show how the company resources were spread and allocated to the projects.
The cash-flow statement will show the actual cash movement per project. It will also show the contribution of each project to the overall performance of the company.
How to prepare project accounting reports
Project management financial reports can be easily prepared by using Microsoft Accounting software like the Microsoft Dynamics CRM or Microsoft Dynamics GP.
Importance of project accounting
Decision-making Project accounting is used by the management for decision-making purposes. Ideally, non-profitable projects must be discontinued and must focus on profitable projects. For budgeting purposes It helps in the process of budget formulation and amendments because resource allocation will be guided by the size and life of each project. Determining the performance of each project Job cost accounting helps to determine the performance of each project and its contribution to the overall results of the organisation. It is used to track down the financial progress of each project as well as the adequacy of inputs vis-a-vis the potential income that can be generated if there is a maximum production.
Problems of project management
Allocation of expenses It is difficult to allocate some costs per project, especially fixed costs like light and heating expenses, because they are charged to the company and not per project. Methods of allocation One method is to use working hours to estimate the fixed-costs per project. Another is the use of a project accounting software, such as an expenses software, to come up with the accurate allocation of over-head and fixed expenses. Inadequacy of financial reports for decision-making Other factors like the company’s goodwill and strategic location require consideration as well when making a decision to discontinue non-profitable projects, thus a decision based on financial project reports is not convincing.