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How do we correctly book a contract sale for photovoltaic panels, that we take a deposit of 35%, another 35% when engineering is done and the final 30% at installation? Also on the other side, we currently order the inventory 4 weeks before install, but will be ordering in bulk soon.
ANSWER
The BIDaWIZ Team's Answer:
Are you familiar with the percentage of completion method of accounting? Based on the information you've provided, this type of treatment would make the most sense for the transactions. You would utilize a construction in process (CIP) account which is similar to a work-in-process inventory account. In addition, you would also utilize a billings on construction in process which is similar to a deferred revenue account and offsets the construction in process account. At the end of any accounting period, the difference between the balance in construction in process and billings on construction in process will appear on the balance sheet. For instance if the CIP > Billings on CIP, the difference will be reported as an asset. If Billing on CIP > CIP, the difference will appear as a liability.
we could envision the following journal entries:
To Record Cost of Construction:
Debit: Construction in Progress (Inventory)
Credit: Accounts Payable
To Record Progress Billings:
Debit: Accounts Receivable
Credit: Billings on Construction in Process (Deferred Revenue)
To Record Collections:
Debit: Cash
Credit: Accounts Receivable
To Recognize Revenue (Gross Profit):
Debit: Construction in Progress (Gross Profit)
Debit: Construction Expenses
Credit: Revenue
To Record Completion of The Contract:
Debit: Billings on Construction in Process
Credit: Construction in Progress
References: FASB
State: Utah
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