Why is project accounting different from corporate accounting, and what is involved?

Project Cost Accounting

First, Corporate Finance

Corporate finance deals with

· The organization's financial affairs

· E.g. its financial strategy and health

· The annual financial status

· Year on year

· And the financial outlook for shareholders

· And its sources of funds

· For operations and projects

It is a mandatory and well-established activity

· For almost every type of organization

Then there is Corporate Accounting

In a large organization

· Corporate Finance may be under a "Financial Controller's Department"

· While Corporate Accounting is another department

· Otherwise the two are together

· Under "Corporate Finance and Accounting"

Corporate Accounting

· Is also a well-established discipline

· With well-established standards

What is "accounting"

Accounting may be defined as

· The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof

· Management Accounting, Anthony & Reece, 1975

· Accounting is the language of business

· And must be supported by a well-oiled system

· These days, almost always electronically

· For collecting, storing and retrieving cost data

· To the nearest penny!

Project Cost Accounting - 1

· Project accounting is an essential service

· For supporting Project Cost Management

· And is essentially different from corporate accounting

· Project accounting may be defined as

· The process of identifying, measuring, recording and communicating project cost data

· Within the project time frame

· And not just the fiscal time frame

· It also includes data that

· Represents the cost of work to complete the project

· Is therefore of a speculative nature

· And estimated to a reasonable round number

Project Cost Accounting - 2

Activities include

· Maintenance of project ledgers

· Showing WBS budget line items

· And commitments, expenditures and forecasts

· Ensuring the integrity of the project budget

· Through approved scope changes, fiscal changes, and contingency reallocations

· Verification of invoices and their correct holdback, coding and WBS allocation

Project Cost Accounting - 3

· Verification of overhead charges and their distribution

· Issuing monthly project cost reports that include

· Forecast final costs based on project team input

· And total and period variances

· Flagging significant projected overruns or underruns

· Ensuring final payments of hold back on all contracts

· And closing of accounts when complete

· Transfer of project expenditures from project financing to the organization's fixed asset records

· Upon total project completion

Summarizing the differences - 1

Corporate accounting

· Is a mandatory activity

· Takes a historical view only

· Conforms to generally rigid standards

· I.e. Generally Accepted Accounting Practices (GAAP)

· Is subject to regular financial audit

· Spans fiscal periods

· Typically takes time to report

· And then by the organization's standard chart of accounts

· Includes accruals

· And is accurate to the nearest penny

Summarizing the differences - 2

Project accounting

· Should be a mandatory project service

· Takes a futuristic view

· Standards have not been established

· May or may not be subject to audit

· But should be part of any Project Success Review

· Spans the project life span

· Irrespective of the corporate fiscal accounting

· Must be delivered within a few days of the end of each reporting period

· Relies on forecasts, not accruals

Footnote

You cannot manage a project effectively without a Project Cost Management System

And

Timeliness is more important than absolute precision!