What is WIP accounting?

This moment may feel familiar to many early-stage teams: The work is flowing, the team is busy, and clients are happy, but your numbers still don’t look right. You’ve put in weeks of effort on a project, yet when you open your profit and loss (P&L) statement, the profit isn’t there. The numbers don’t match the energy you’re expending. This disconnect is where work-in-progress (WIP) accounting comes in.

The gap between work done and revenue recognized can get confusing. If you’re a founder, freelancer, or operator of an agency, consultancy, or legal firm, for instance, your business may deliver work across weeks or months. That means you’re dealing with WIP accounting, whether you know it or not.

Getting WIP accounting wrong doesn’t just create messy books. It can distort your margins, misrepresent your cash flow, and make your financial decisions feel like guesswork.

In this article, we explain how to untangle WIP accounting confusion and, instead, get clarity.

Work-in-progress accounting tracks the value of partially completed work that hasn’t been billed or recognized as revenue yet.

If your work spans more than one billing cycle, WIP accounting becomes essential. It shows what you’ve earned so far, even if the invoice isn’t out the door.

Industries that rely heavily on WIP accounting include:

• Marketing, design, and creative agencies
• Consulting and professional services
• Law firms
• SaaS implementation
• Construction and manufacturing

In short, if you start work in one period and finish it in another, WIP helps your financials keep up with reality. And, if you’ve ever wondered how WIP accounting is handled differently across industries, the answer usually comes down to timing, billing structure, and project complexity.

The clearest way to think about WIP is as an asset on your balance sheet. That’s because it represents work you’ve done that will turn into revenue. It stays there until the work is complete or you bill the client. As progress is made, you recognize revenue based on either time spent or percentage of completion, depending on how your business operates.

WIP accounting is not the same as inventory or accounts receivable (invoices that have already been issued). WIP accounting sits in between these concepts because it’s work that’s underway, has value, and needs to be tracked.

When your team works on a client project, your books should reflect the effort. As work is performed, here’s how to track your work and expenses with WIP accounting entries:

• Debit: WIP asset account
• Credit: Labor, materials, or expense accounts

This builds the value of work completed so far. When the work is completed (or billed), here’s how to account for your work and expenses:

• Debit: Cost of goods sold (COGS) or project expenses
• Credit: WIP asset account

This moves the value out of WIP and into your income statement. Then, revenue is recognized and matches when the work was actually done.

This matching principle is what keeps your margins accurate and your financials trustworthy.

For service companies, WIP accounting isn’t academic, but operational. It gives you visibility into how your work translates into revenue.

Your time tracking becomes revenue forecasting

If your team logs hundreds of hours in a month, your books should show the value of that effort, even before invoices go out. It gives you an early signal of how your month will land financially, instead of waiting for billing cycles to catch up.

It stabilizes profitability reporting

Without WIP accounting, a long project can skew your income statement. For instance, you could see all expenses this month and all revenue next month. With WIP, you get a truer picture. This makes it easier to understand real performance trends and avoids the spikes and dips that can hide underlying issues.

It prevents revenue overstatement (and tax issues)

Booking all revenue at once can inflate your numbers and create compliance headaches later. Spreading revenue based on actual progress may keep you aligned with accounting standards and reduce the risk of costly corrections down the line.

Real-world example

Say a marketing agency signs a $50K, three-month project. At the end of month one, they’ve completed roughly half of the work. 

Without WIP accounting, their books show:

• $0 revenue
• $20K in labor costs
• Negative margins

With proper WIP accounting, their books reflect:

• $25K recognized revenue
• $20K matching costs
• A profitable project underway

The first version tells a confusing story. The second tells the truth.

The earlier you introduce WIP accounting discipline, the cleaner your financial system will become — and the more informed and confident your business decisions will feel. Here’s how to start.

1. Align time tracking or project progress with accounting entries

If you track hours or milestones, make sure they mirror how revenue is recognized.

2. Automate where you can

Project management tools and accounting platforms can handle the flow of data, especially as you scale.

3. Work with a bookkeeper who knows service-based revenue

Not all accountants specialize in professional services. You want someone who understands WIP accounting, percentage of completion, and multi-month projects.

4. Don’t wait until your business is big to fix this

WIP accounting sets the foundation for predictable cash flow and accurate reporting. It’s worth getting it right on day one. 

When you manage your financial operations through a unified system, like Mercury, these workflows become dramatically easier to maintain.

There’s more than one way to recognize revenue. Here’s a quick, founder-friendly comparison of three accounting methods: WIP, percentage of completion, and completed contract.

WIP accounting focuses heavily on cost matching. It asks, “How much effort have we put in so far, and what’s that work worth?” It’s ideal for service businesses in which labor is the primary driver of value and work often spans multiple months.

The percentage of completion method is more structured. It asks, “How complete is this project overall, and how much revenue does that completion justify?” It works well when deliverables clearly move from phase to phase, such as a project with defined timelines and approval steps.

The completed contract method delays everything. It asks, “Is the project 100% done?” If not, nothing hits your revenue line yet. This approach can smooth out uncertainty for volatile or short projects, but it creates lumpy financials and weak visibility for longer engagements.

These methods solve different problems depending on how your work is structured.

What this means for founders

• For accurate margins month-to-month: Use WIP accounting or the percentage of completion method, based on your business.
• For cleaner client reporting:The percentage of completion method can be more natural because it aligns to milestones.
• For short, unpredictable, or fixed-fee projects: Completed contracts can help prevent premature revenue recognition.
• For growing teams with many projects: WIP accounting may offer the most flexible way to track the value of work underway, without needing rigid phases.

WIP isn’t just an accounting exercise. It’s a decision-making tool. When you understand the value of work underway, you can forecast with more confidence. You’ll know when to hire, when to slow down, when to take on more projects, and when to push back on scope creep.

For teams working across multiple projects at once, consistent WIP tracking also reveals which engagements actually drive profitability. Some projects look healthy only when they’re finished. WIP gives you the truth early, when you can still course-correct.

The clearer your WIP accounting, the stronger your operations. And when your banking, payments, and financial workflows live in one place — such as on Mercury — you’re not guessing. You’re steering. 

Learn how Mercury’s accounting automations help you keep cleaner books and get a clearer view of your finances.