Basic Project Accounting Using Your General Ledger

Overview

The most general definition of project accounting would be tracking financial transactions by project including costs, billings, and revenue. What constitutes project accounting in a company is based on several factors including company type, the number of projects and company size.

For project centric companies such as Consulting Firms, Architect and Engineering Firms or Software Publishers, project accounting is one component of several operational processes used in controlling projects, maximizing project profitability, accurately billing customers and ensuring customer satisfaction. For project centric companies, the General Ledger (GL) is not sufficient. A comprehensive project management solution is needed. If your company uses Dynamics 365 BC, you may want to take a look at Progressus Software.

Non-project centric companies use project accounting to track internal projects such as a marketing campaign, or some type of capital improvement. Some companies decide to use a single GL account to capture project related transactions, then maintain spreadsheets to organize and report project detail. While this process can work for simple project accounting needs, I’m not a big fan of using non-integrated data silos. Some of the disadvantages experienced when using this approach appear below:

• When downloading transactions to, and generating reports from, spreadsheets additional reconciliation between the GL and the spreadsheet is required, as data are now stored in two separate silos. Accurate project reporting is dependent on data consistency.
• Any spreadsheet and/or GL changes related to project accounts need to be coordinated. Uncoordinated systems cause download process errors which cause reconciliation and reporting problems. This is a major dis-advantage of using non-integrated systems, as both systems need to be updated simultaneously.
• Spreadsheets need to be simple. Many accountants are well-versed in Excel. However, that’s not the case for all accountants. This is particularly true in smaller companies who use entry level accountants or bookkeepers. Remember, you’re using this process to track simple projects and as such, the associated spreadsheets should be simple and easy to use. Try to stay away from macros, pivot tables and other advanced functionality. At the very least, document how the spreadsheet is built to allow others to use it when necessary.

You can also track project transactions directly in the general ledger (GL) and not use spreadsheets.

Using the GL to track project accounting transactions can be accomplished using a set of project GL accounts and sub-accounts. The accounts are used together to classify project accounting transactions. For example, accounting sets up a GL account representing a single project (e.g., warehouse equipment upgrade). Depending on the project, the GL account may be mapped to the Balance Sheet or Income Statement.

Using this method, sub-accounts are then built beneath the GL account to capture the details. In our example, the GL project account would be warehouse equipment upgrade. Sub-accounts underneath the project account would be sub-accounts such as engineering fees, equipment, installation etc.

As the applicable project transactions are processed, accounting and accounts payable code the transactions to the applicable GL account or sub-account. Additional transaction details can be entered in the transaction description or (if the system supports it, in the transaction entry screen notes section or via “user defined screen fields”).

If your company is using an ERP such as Dynamics 365 BC, you can set up separate GL accounts and use dimensions to achieve the appropriate granularity.

A note about dimensions

Dynamics 365 BC supports a functionality known as dimensions. Dimensions can greatly reduce the number of sub-accounts needed. Dimensions are selected when processing journal entries or in the vouchering process to provide additional detail. The advent of ERP dimensions functionality is very promising. To learn more about dimensions, see the Microsoft learning website https://learn.microsoft.com/en-us/dynamics365/business-central/finance-dimensions .

Using the GL as the basis of project accounting provisions all the GL features to the user including budgeting and report writers.

Since most ERPs today support multiple budgets, a separate project budget can be built for a project and used in project reporting. This is a powerful feature as all the project information is now captured in one data silo making project reporting more efficient while increasing accuracy. Uploading and downloading from the GL to spreadsheets is eliminated, as well as the associated reconciliations.

Using the ERP report writer, the project accountant can use its advanced report creation features and report delivery options.

Functionality, Measures and Alerts

Measures and alerts are meant to assist the user in keeping abreast of processing status, identifying anomalies, and ensuring that implemented process controls are being effectively employed. The information below illustrates the interaction between ERP functionality, measures and alerts.

Functionality- ERP GL Chart of Accounts

Measures and Alerts-

New GL project accounts setup

GL project account edits processed

GL project account disabled or deleted

Today, all ERPs support building roles and permissions to control transaction processing and other tasks. This means that with proper permissions assigned, a user can setup, edit, disable or even delete project GL accounts. This functionality should be tightly controlled. If not used properly, it will have a negative impact on project accounts and hence on data analysis and financial reporting.

For an elevated level of control, assign COA permissions to a single user such as a senior accountant, accounting manager or the controller. Remember though, limiting permissions to a single user is impractical as “out of office” situations can affect timely processing. A better approach might be to assign permissions to more than one user. Assign one user as the primary, and the another as their backup.

 Functionality- ERP Budgeting

Measures and Alerts-

Project budgets entered

Project budgets changes

Project specific budgets can be prepared in addition to the financial budget. Leverage the ERP’s multiple budgeting functionality to create the project budget. Using a separate project budget allows accounting to select the project budget in project reporting and analysis, supporting additional data granularity needs without impacting the financial budget.

Process Implementation Best Practices

Successfully implementing a new process isn’t always easy. Consider the best practices below to streamline and control new process implementations.

Understand the Process

• Be sure that all accounting team members involved in project accounting understand the tasks that apply to the project accounting process.
• Build and distribute a process document outlining the steps to be completed and any source document requirements.
• Review project budgeting functionality with the applicable project accounting team members and assign the proper system permissions as warranted.
• Review the project budgeting process with non accounting company team members involved (e.g., project managers).

Align Resources

• Assign project account, sub-account and budget tasks to specific project accounting team members. Include coverage to support out of office situations.
• Be sure that any company executives involved in the project budget review and approval process are aware of their responsibilities and tasks required (e.g., review, revisions and approval).
• Be sure that non accounting project budgeters are aware of the budget process timeline. Prepare and distribute project budget preparation schedules and ensure that all budgeters are on-board.
• Assign measures and alerts review tasks to the applicable accounting team members.

Improve the Process

• Use ERP tools, measures and alerts to assist in identifying and resolving project accounting and project budgeting issues. Resolve any issues identified as soon as possible.
• Use technology such as data import and budget worksheet templates to streamline the project budgeting process.
• Use additional project budget template worksheet tabs to allow the budgeter to include calculation descriptions and attach source document information, making the review process more efficient.

Process Communication

• When hiring new project accounting team members, be sure to include project budgeting training as a part of their onboarding. If the team member(s) are at a manager level, include any additional tasks in the process training as required. Assign a temporary mentor from accounting to ensure that training happens.
• When hiring new team members (non-accounting team members) who will be involved in the project budget process, be sure to include the applicable budget training prior to the next budget cycle. Again, assign a temporary mentor from accounting.

Common System Permissions

System permissions and security functionality play a vital role in any ERP process. Using these ERP tools allows the user to set up efficient and controlled processes.

Common project accounting functionality, measures and alerts examples are displayed in the tables below:

Conclusion

Accurate project accounting is the foundation of effective project management. While the level of project accounting activity and detail is dependent on company size and management needs, it’s critical to be able to compare actual results against a known project target in making informed project decisions.

No matter which project accounting method or level of detail you need, remember that some type of project accounting process is an important part of a well-run company.

A successful project accounting process tracks project activity accurately, assists the company in controlling project spending and keeps project team members aligned.

Process Flow