Understanding Work in Progress (WIP) for Service Firms
If you run a professional services firm—such as an accountancy practice, law firm, consultancy, marketing agency—your biggest asset is your team’s time. But how do you reflect time spent on client work that hasn’t yet been invoiced?
This is where Work in Progress (WIP) plays a vital role in your accounting and tax planning. In this article, we’ll explain what WIP means in accounting, how it appears on the balance sheet, why tracking employee time is essential, and the potential tax implications of getting it wrong.
What is Work in Progress (WIP) in Accounting?
Work in Progress (WIP), sometimes referred to as unbilled revenue or work done not yet invoiced, is the value of services that have been delivered but not yet billed to the client.
In professional services accounting, WIP is recorded as a current asset on the balance sheet. It represents income that the business expects to receive once an invoice is raised for services performed.
Example of WIP
If your consultancy team logs 80 hours for a client project in April but doesn’t issue an invoice until May, that time has a value. The time-based value of the 80 hours should be recognised as WIP on your balance sheet at the end of April, assuming the revenue is deemed recoverable.
Why is WIP Accounting Important in Professional Services?
Professional services firms operate differently from product-based businesses. Instead of selling stock, you’re effectively selling time. If you’re not tracking and accounting for that time properly, your financial statements and tax returns could be misleading.
Key reasons why WIP accounting matters:
Accurate financial reporting – Your accounts will reflect the real economic activity of your firm.
Cash flow management – Helps identify where time is being spent but not yet invoiced.
Performance tracking – Understand profitability per project, team, or client.
Tax compliance – Prevents under or overstatement of taxable income.
Why Tracking Employee Time is Essential for Accurate WIP
A reliable time-tracking system is crucial to accurately measure WIP. Without it, firms are left estimating the value of ongoing work, which increases the risk of errors.
Benefits of tracking employee time:
Helps calculate the correct value of WIP for monthly reporting
Supports revenue recognition for fixed-fee and hourly projects
Allows for better resource and profitability management
Reduces the risk of tax underpayment or overpayment
Tax Implications of Work in Progress
Incorrect treatment of WIP can lead to serious tax issues. HMRC expects businesses to recognise income based on the work performed, not just when an invoice is sent.
Key tax considerations:
If you use the accrual basis of accounting, you must report income when it’s earned—not when paid.
Overstating WIP may accelerate your tax liability.
Understating WIP may defer tax and trigger penalties or interest if discovered in an enquiry.
In short, your WIP balance must be supportable, recoverable, and consistently reviewed.
Best Practices for Managing Work in Progress
To ensure your WIP is recorded and managed accurately, professional services firms should implement the following:
1. Use Time Tracking Tools
Leverage software that enables your team to log hours against projects in real time. This ensures no time slips through the cracks.
2. Regularly Review WIP Balances
Conduct monthly WIP reviews with your finance team or accountant to identify write-offs or billing delays.
3. Align WIP with Project Milestones
For longer-term contracts, consider recognising WIP in line with project stages or deliverables completed.
4. Train Your Team
Help your employees understand the financial impact of timely and accurate time logging.
5. Work with a Professional Accountant
An accountant who understands the nuances of WIP in professional services can help ensure compliance and profitability.
Final Thoughts: Don’t Let Billable Time Go Unaccounted For
In the professional services world, your time is your inventory. If you're not capturing it accurately through WIP, your accounts may be understating your true performance—and your tax position could be at risk.
At HMS Accountancy, we work with professional services firms to implement smart financial systems that ensure WIP is tracked, valued, and reported correctly. Whether you're working on fixed-fee engagements or time-based billing, we can help you get it right.
Need Help With Work in Progress Accounting?
If you're unsure whether your WIP is being accounted for properly or need help implementing better time tracking and reporting systems, get in touch with our team today.
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