CHAPTER ONE

OVERVIEW OF PROJECT ACCOUNTING

CHAPTER OUTLINE
–Introduction to Accounting and Project
–Overview of Accounting
–Over view of Project
–Characteristics of a project
–Project Performance Dimensions
–The task of accounting for a project
–The role of Project Accountant
–Project Life Cycle
–Project Classification
1.1. Introduction to Accounting and Project
What is Accounting?
• Accounting is “the skill or practice of maintaining and
auditing accounts and preparing reports on the assets,
liabilities, etc, of a business”.
• Accountants are responsible for overseeing accounts,
and producing statutory accounts and tax returns in
compliance with the law.
• Accounting is the universal language of business.
• The essential characteristics of accounting are
I. The identification, measurement, and communication
of financial information about
II. economic entities to
III. interested parties.
 Accounting provides information both to internal users and
the external users.
 The internal users are all the organizational participants at
all levels of management (i.e. top, middle and lower).
 top level management requires information for strategic
planning,
 middle level management to make tactical decisions and
intermediate plans on how to achieve plans made by the top
managers.
 While the lower level mangers are controllers of operations and
implementations, they interact directly with the workers and
understand their problems better.
For internal use, the information is usually provided in the form
of reports, for instance Cash Budget Reports, Production Reports,
Idle Time Reports, Feedback Reports, whether to retain or replace
an equipment decision reports, project appraisal report, and the
 There are also the external users (e.g. Investors,
Banks, Creditors, Customers, Employees,
Suppliers, Government units).
 They do not have direct access to all the records of
an enterprise,
 they have to rely on financial statements as the
source of information.
 External users are basically, interested in the
solvency and profitability of an enterprise.
 Accounting is the systematic process of measuring the
economic activity of a business to provide useful
information to those who make economic decisions.
 It is often called the “language of business”.
 This is because accounting is the means by which business
information is communicated to the stakeholders.
 The stakeholders of the business organizations are person
or entity having an interest in the economic performance
of the business that uses accounting reports primary
sources of information on which they base their decisions,
 which includes owners, managers, employees, customers,
creditors and governments. The following illustration
shows how accounting is considered as language of
business.
For example : MrX is considering selling T-shirts in the
parking lot during his university’s football games. MrX, of
course, will do this only if he expects to make a profit. To
estimate his profits, MrX needs certain pieces of information,
such as the cost of a shirt, the university’s charge for the
right to conduct business on its property, the expected
selling price, and the expected sales volume. Assume MrX
has developed the following estimates:
Sales price per shirt………………………..… $ 12
Cost per shirt …………………………………... $ 7
Number of shirts sold per game day ……50
University fee per game day……………... $100
 Although developing estimates is difficult, let’s take these
estimates as given. Based on the estimates, MrX would
earn a profit of $150 per game day.
Sales ($12 * 50) ……………………………………..………$600

Less expense:

Cost of merchandise ($7 *50) …………………………. $350

University fee…………………………………………….…….. $100

Total expenses ……………………………………..………….. (450)

Net income ……………………………..…………………………$150

Since this looks like a reasonable profit, MrX puts his plan into

action. After his first game day, MrX needs to assess his success

or failure
Based on his actual results, MrX prepares the following information:

Sales ($12 * 40) ……………………………………..$480

Less expense:

Cost of merchandise ($7 *40) ……….……..$280

University fee………………………………………. $100

Total expenses………………………………………..($380)

Net income ……………………………………………$100

 MrX’s business was profitable, even though not profitable as he anticipated. This is

because MrX sold fewer shirts than he hoped, but MrX is confident that he can sell

any remaining shirts on the next game day.

 The preceding illustration shows two ways in which accounting can be used. First,

MrX used accounting to help plan his business. That means he used accounting to
Second, after MrX operated his business for a day, he used
accounting to decide if, in fact, he had made a profit.
 In general, accounting is used during all phases of planning
and operating a business.
 Therefore, the main purpose of accounting is to provide
financial information to be used for decision- making.
For instance business executives and managers are in need of
accounting information for planning and control of the activities
of their businesses.
 Outsiders like bankers, investors, employees, Labor unions,
and others also need accounting information for their own
distinct purposes.
 In general, the goal of accounting is to provide useful
information to decision makers. Thus, accounting is the
connecting link between decision makers and business
operations.
 Financial accounting is the process that culminates in
the preparation of financial reports on the enterprise
for use by both internal and external parties.
 Users of these financial reports include investors,
creditors, managers, unions, and government agencies.
 In contrast, managerial accounting is the process of
identifying, measuring, analysing, and communicating
financial information needed by management to plan,
control, and evaluate a company’s operations.
 Financial Statements are the principal means through
which a company communicates its financial
information to those outside it.
 These statements provide a company’s history
quantified in money terms.
What is a project?
 There is no one comprehensive definition for a project.
 Its definition varies from author to author, from organization to
organization, and based on the nature, objective and other
characteristics of the project.
 As a result you may find several definitions of a project in the
literature some of which are provided below.
 A project is an organized effort to do something useful or attain a
useful end result which is sometimes defined as a plan, venture or
enterprise.
 A project is a temporary endeavor undertaken to create a unique
product, service or result.
 Project is a unique process intended to achieve target outcomes
 A project is a means of moving from a problem to a solution via a
series of planned activities.
 A project has a definite beginning and end. Projects consist of
several activities.
Examples of projects:
 A construction company contracts with a large local
manufacturer to build a new production facility.
 A state government contracts with a software development
company to create a new welfare payment management system
for its citizens.
 A small firm creates small batches of watches and sells them to
collectors. It usually takes four prototypes before a new watch
model is ready for a limited production run.
 Each of the prototypes is considered a project, since the output
is unique and there are clearly-defined start and stop dates
associated with each prototype.
 The production of the small batches of finalized watches cannot
be considered projects, because their output is not unique
(even though these production runs have clearly-defined start
and stop dates).
 A major misconception about a project is relating it
to only construction or creation of such physical
facilities as buildings, roads and dams.
 However, project may involve intangible things
such as creation of awareness (e.g. about
HIV/AIDS), eradication of diseases (e.g. polio
vaccination), combating harmful practices (e.g.
genital mutilation) and capacity building (e.g.
training to enhance service delivery capabilities of
public sector employees).
1.2. Characteristics of a project
1. There is a beginning and an end: The activity has a
clear start and end date.
 This means that it is not intended to continue in
perpetuity, as would a functional area of a business,
such as the production department.
 Each project is an ad hoc organization of human,
physical and financial resources, and activities
assembled to accomplish a goal within a scheduled
time frame.
The project come to an end when
i. The objectives are met or
ii. The sponsor decides to terminate the project as the
objectives can not be met or are no longer required.
2. The output is unique: The activity is intended to
produce a specific activity or product.
 This means that it does not produce an on going stream
of goods or services, as would a production line or
consulting practice.
 For example, even in a project such as construction of
house, variables such as design, location, materials
used, people involved and timing make it unique.
 Besides, project uniqueness means that each project is
a distinct and separate entity which can be planned,
financed and implemented as a unit.
 Uniqueness, however, does not mean that there is no
similarity between projects; it rather means that their
differences often outweigh their similarities.
3. Time-based: it should identify a definite target date for
completion and/or frequencies for specific action steps that are
important for achieving the goal on/within a specific time period.
 The general rule is that project goals should be SMART – an
acronym for:
 Specific – well defined and clear to anyone that has a basic
knowledge of the project,
 Measurable – how do we know how far away completion is
and when it has been achieved,
 Action-oriented – indicate what should be done to achieve the
objective,
 Reliable/achievable – do we have the resources (human,
financial, material, information, time) to make the goal happen?
 Time-Is the objective achievable with the available resources
and time frame.
4. Requires set of resources:
 Project involves different resources drawn from
different functions, organizations and professions
that cross beyond the ordinary boundaries of an
organization and its functional units.
 An exception to this could be a project in a
portfolio of projects which share common
resource pool.
Portfolio is a collection of sub portfolios, program,
projects, and operations managed as a group to
achieve strategic objectives.
 Project resources include human, material,
financial and information.
 A program is a group of projects that are managed
together, to make the most of their interrelated status.
 For example, a construction company that is working on a
new subdivision manages each house in the subdivision as
a separate project.
Illustration that shows Portfolio, Project and program
 a software development company has identified three
strategic business objectives:
 "Innovate in the industry,"
 "Develop secure software," and
 "Provide top-notch customer support."
 The organization sets up portfolios for each of these
objectives (Innovation, Security, and Support), and aligns
the current projects and programs within these portfolios.
Portfolio Project Program
1. innovation Competitive analysis Industry training
(Includes three projects:
"Identify external resources,"
"Train product managers,"
and "Attend conferences."

2. Security Security testing Implement server-based

registration system
(Includes two projects: "Build
server farm" and "Develop
registration code.")

5.Support
3. Purpose: P1:
clearly
Deploy defined outcomes,
call centre with resources
Online customer an
ticketing system (Includes two projects: "Build
element of complexity, which
P2: Hire and train call needs
customerco-ordination.
interface for
centre staff ticketing system" and
"Develop and release e-
learning resources.")
6. Involves risk and uncertainty:
 Garratt (2007) provided a distinction between
uncertainty and risk by referring to the presence
or absence of probability.
 With risk, different outcomes can be estimated
according to their probability.
 For uncertainty, the probabilities themselves are
unknown.
 Complicating the distinction is that project risk is
also associated with the risk event or condition,
 the trigger for the event/ condition to occur, and
the estimated impact/outcome.
Risk can be classified in various ways. One
classification of risk may includes:
a. External risk: Arise out of external factors. For
example regulatory, governmental policies, sub
contractors, suppliers and environmental.
b. Internal risk: arise within the project: Funding,
resources and prioritization.
c. Technical risk: arise out of the technology being
used. Exa. Requirements, Technology and quality.
d. Project Mgt Risk: arise out of project mgt
activities. Exa. Estimating, planning, schedule and
communication.
Illustration of Project Risk Event and Characteristics
The project is the development of a new airport terminal and the key
objective is to have a smooth opening day. Part of the project was the
installation of an automatic baggage handling system, not used before in
other airports in the region. Uncertainty therefore exists about this
system. One of the risks is the event of the automatic system breaking
down. The probability of this occurring is regarded as high because of
the adoption of new technology, and so is the impact since baggage
would quickly pile up. The risk itself is triggered by the malfunction of
the new system which would result in a negative outcome because
travellers would feel frustrated and avoid the airport in future. On the
other hand, there could be a positive outcome should the risk event not
be triggered. In this case travellers would be pleased since the
tediousness of baggage handling is replaced by an automated system.
Required: Summarises the two scenarios and shows the different
outcomes for negative and positive project risk, and also indicates that
probability is not associated with uncertainty but with the risk
event/condition.
Solution
Concept Description

Smooth opening of airport

Project objective
terminal.

About the automated baggage

Uncertainty
handling system.

Negative risk Automatic baggage handling

event/condition system breaks down.

Malfunction of automated
Risk trigger
baggage handling system.
Concept Description

Probability High - new technology.

Impact High - baggage piling up leading to chaos.

Value loss - travellers are frustrated by delays and boycott

Outcome
airport in future.

Positive risk Automatic baggage handling system works reliably and

event/condition efficiently.

Risk trigger Automated baggage handling system operates as planned.

Value gain - travellers are pleased by speed of baggage

Outcome
handling and will prefer airport to others.
6.Requires cross-functional teams and interdisciplinary
approach:
 A cross-functional team, also known as a multidisciplinary
team or interdisciplinary team, is a group of people with
different functional expertise working toward a common
goal.
 It may include people from finance, marketing, operations,
and human resources departments.
 Excellent Communication.
 Thorough Organization.
 Clarity.
 Mutual Understanding.
 Individual Attention.
 Conflict Resolution.
 Strong Ties.
 An A-Team
1.3. Project Performance Dimensions
 Three major dimensions that define the project
performance are:
a. scope,
b. time, and
c. Resource (Cost).
 These parameters are interrelated and interactive.

Time Scope

Fig 1: Project performance dimension

Resource
 In management literature, this equilateral triangle is also
referred as the “Quality triangle” of the project.
Con………………………………
a. Scope is what the project is trying to achieve,
o it entails all the work involved in delivering the
project outcomes and the processes used to
produce them;
o it is the reason and the purpose of the project.
o Scope is the boundary of a project, it is what the
beneficiaries, and the donors expect from the
project, nothing more, and nothing less.
o In general project scope includes all and only the
work essential to complete the project
successfully.
Con…………………………………………
b. Budget or the costs approved for the project including all
required expenses needed in order to deliver the project.
 In development projects managers have to balance between
not running out of money and not under spending,
 because many projects receive funds or grants that have
contract clauses with a ‘use it or lose it’ approach to project
funds.
 Poorly executed budget plans can result in a last minute rush
to spend the allocated funds.
Con………………………………
c. Schedule/Time is defined as the time required to
complete the project.
o The project schedule is often the most frequent
project oversight in developing projects.
o This is reflected in missed deadlines, incomplete
activities, and late donor reports.
o Proper control of the schedule requires the
careful identification of tasks to be performed, an
accurate estimation of their durations,
o the sequence in which they are going to be done,
and how people and resources are allocated.
 It is evident that any change in any one of dimensions would
affect the other.
 For example, if the scope is enlarged, project would require more
time for completion and the cost would also go up.
 If time is reduced the scope and cost would also be required to be
reduced.
 Similarly any change in cost would be reflected in scope and time.
 Successful completion of the project would require
accomplishment of specified goals within scheduled time and
budget.
 In recent years a forth dimension, stakeholder satisfaction, is
added to the project.
 However, the other school of management argues that this
dimension is an inherent part of the scope of the project that
defines the specifications to which the project is required to be
implemented.
Con………………………….
 Thus the performance of a project is measured by the
degree to which these three parameters (scope, time
and cost) are achieved.
 Stake holder can be defined as any individual, group,
or organization who may affect, be affected by or
perceived it self to be affected by a decision, activity
or outcome of a project.
For example: project team, project manager, project
sponsor, project mgt office, customers etc are
stakeholders of the project.
 The project sponsor is the one who gives a go ahead
for a project and provides the necessary resources to
execute the project.
1.4. The task of accounting for a project
First we should define what is project accounting?
 Project Accounting ( some times Job cost Accounting) is the
practice of creating financial reporting specifically designed to
track the financial progress of project.
 Project accounting focuses on the financial transactions related
to managing a project including costs, billing and revenue.
 Professionals such as project managers and accountants use this
method to integrate key financial tasks on a project-by-project
basis and report their progress and success to management.
It is important for:
 Generating billings to customers, depending on the type of sales
contract entered into with them.
 Recognizing revenue based on the dictates of International
Financial Reporting Standards (IFRS).
 Deciding which costs to charge to a project, how
this information is to be recorded, and how it is to
be presented in financial reports.
 How to monitor the costs incurred by a project,
and what process to use to obtain additional
revenue from customers.
 How to incorporate additional accounting concepts
into a project, such as interest capitalization and
asset impairment.
 Whether controls and measurements should be
built into the system of accounting for a project,
 so that only necessary costs are incurred and there
is a reasonable feedback loop to management.
1.5. The role of Project Accountant
What is the Project Accountant?
o Project accountants are financial specialists who review project
budgets.
 responsible for helping a project manager monitor progress and
transactions, including tracking financial variances, expenses
and any revenues.
 They oversee client invoicing and payments to suppliers.
 Project accountants must understand the management accounting
and financial accounting of their company and apply these
concepts to the projects that management assigns them.
 Often, project accountants need knowledge of the business’s entire
financial function to manage their projects effectively.
 They are a business’s gatekeepers of information about how their
projects are doing and advise project teams on how their decisions
affect the project finances.
 A project accountant is usually assigned to any
reasonably large project.
 This position is accountable for monitoring the
progress of projects, investigating variances, and
ensuring that project billings are issued to
customers and payments collected.
 Project Billing is the total amount of money a
Customer pays for a project.
 In certain cases where the accountant reports to
the project manager, the accountant is also
expected to approve expenses.
The principal accountabilities of a project
accountant are as follows:
a. Record Management
 Create project accounts in the accounting system
 Maintain project-related records, including
contracts and change orders
 Authorize access to project accounts
 Authorize the transfer of expenses into and out of
project-related accounts
 Close out project accounts upon project
completion.
b. Expense Oversight
 Review and approve supplier invoices related to a
project
 Review and approve time sheets for work related
to a project
 Review and approve overhead charges to be
applied to a project
 Review account totals related to project assets and
expenses
 Investigate project variances
 Confer with receivables staff regarding unpaid
contract billings
c. Customer Billings
 Create or approve all project-related billings to
customers
 Investigate all project expenses not billed to customers
 Approve the write off of any project-related billings
that cannot be billed to or collected from customers
d. Management Reporting
 Report on project profitability to management
 Submit variance reports to management
 Report to management on any opportunities for
additional billings
 Report to management regarding the remaining
funding available for projects
e. Outside Party Reporting
 Respond to requests for more detail from
customers
 Create and submit government reports and tax
returns related to projects
 Compile information for internal and external
auditors, as required.
1.6. Project Life Cycle
 Every project, from conception to completion, passes through
various phases of a life cycle synonym to life cycle of living beings.
 There is no universal consensus on the number of phases in a
project cycle.
 An understanding of the life cycle is important to successful
completion of the project as it facilitates to understand the logical
sequence of events in the continuum of progress from start to finish.
 Typical project consists of four phases:
A. Conceptualization,
B. Planning,
C. Execution, and
D. Termination
 Each phase is marked by one or more deliverables such as Concept
note, Feasibility report, Implementation Plan, HRD plan, Resource
allocation plan, Evaluation report etc.
A. Conceptualization Phase
 Conception phase, starting with the seed of an idea,
it covers identification of the product / service, Pre-
feasibility, Feasibility studies and Appraisal and
Approval.
 The project idea is conceptualized with initial
considerations of all possible alternatives for
achieving the project objectives.
 As the idea becomes established a proposal is
developed setting out rationale, method, estimated
costs, benefits and other details for appraisal of the
stakeholders.
 After reaching a broad consensus on the proposal the
feasibility dimensions are analysed in detail.
B. Planning Phase
 To plan means to determine the necessary activities to be
carried out, the deadlines, the resources required and the time
at which they must be available, the available budget.
 In this phase the project structure is planned based on project
appraisal and approvals.
 Detailed plans for activity, finance, and resources are
developed and integrated to the quality parameters.
 In the process major tasks need to be performed in this phase
are
 Identification of activities and their sequencing
 Time frame for execution
 Estimation and budgeting and
 Staffing
 A Detailed Project Report (DPR) specifying various aspects of
C. Execution Phase
 This phase of the project witnesses the
concentrated activity where the plans are put into
operation.
 Each activity is monitored, controlled and
coordinated to achieve project objectives.
Important activities in this phase are:
 Communicating with stakeholders
 Reviewing progress
 Monitoring cost and time
 Controlling quality
 Managing changes
D. Termination Phase
 This phase marks the completion of the project wherein the agreed
deliverables are installed and project is put in to operation with
arrangements for follow-up and evaluation.
 The accounting books were reconciled and closed, final reports
written and distributed, and the project manager started on a new
project.
Life Cycle path
 The life cycle of a project from start to completion follows either a “S”
shaped path or a “J “ shaped path
 In “S” shape path the progress is slow at the starting and terminal
phase and is fast in the implementation phase.
For example, implementation of watershed project. At the beginning
detailed sectoral planning and coordination among various implementing
agencies etc.
 makes progress slow and similarly towards termination, creating
institutional arrangement for transfer and maintenance of assets to the
 100 Slow finish

% age completion

Quick Momentum

Slow start
Time
Project life path “S” shape
 In “J” type cycle path the progress in beginning is slow and as the
time moves on the progress of the project improves at fast rate.
Example, in a developing an energy plantation.
 In this the land preparation progresses slowly and as soon as the
land and seedling are transplantation is under taken.

100

% age completion

Time
Project life cycle path - “J” Shape
Illustrative example of the 4 project life cycle of Large Multinational
Project
1. Initiation phase/ Conceptualization Phase may includes
 U.S. construction company won a contract to design and build the first
copper mine in northern Argentina. There was no existing infrastructure
for either the mining industry or large construction projects in this part
of South America.
 During the initiation phase of the project, the project manager focused
on defining and finding a project leadership team with the knowledge,
skills, and experience to manage a large complex project in a remote
area of the globe.
 The project team set up three offices. One was in Chile, where large
mining construction project infrastructure existed. The other two were in
Argentina. One was in Buenos Aries to establish relationships and
Argentinian expertise, and the second was in Catamarca the largest town
close to the mine site.
 With offices in place, the project start-up team began developing
procedures for getting work done, acquiring the appropriate permits,
2. Planning Phase may includes
 During the planning phase, the project team developed an
integrated project schedule that coordinated the activities of the
design, procurement, and construction teams.
 The project controls team also developed a detailed budget that
enabled the project team to track project expenditures against the
expected expenses.
 The project design team built on the conceptual design and
developed detailed drawings for use by the procurement team.
 The procurement team used the drawings to begin ordering
equipment and materials for the construction team; develop
labour projections; refine the construction schedule; and set up
the construction site.
 Although planning is a never-ending process on a project, the
planning phase focused on developing sufficient details to allow
various parts of the project team to coordinate their work and
allow the project management team to make priority decisions.
3. The implementation/excution phase may include
 The implementation phase represents the work
done to meet the requirements of the scope of work
and fulfil the charter.
 During the implementation phase, the project team
accomplished the work defined in the plan and made
adjustments when the project factors changed.
 Equipment and materials were delivered to the work
site, labour was hired and trained, a construction site
was built, and
 all the construction activities, from the arrival of the
first dozer to the installation of the final light switch,
were accomplished.
4. Termination / closeout phase may includes
 The closeout phase included turning over the
newly constructed plant to the operations team of
the client.
 A punch list of a few remaining construction items
was developed and those items completed.
 The office in Catamarca was closed, the office in
Buenos Aries archived all the project documents,
and the Chilean office was already working on the
next project.
 The accounting books were reconciled and closed,
final reports written and distributed, and the
project manager started on a new project.
1.7. Project Classification
 There is no standard classification of the projects.
 However considering project goals, these can be
classified into two broad groups,
a. Industrial and
b. Developmental
 Each of these groups can be further classified
considering nature of work (repetitive, non-
repetitive), completion time (long term, short term
etc), cost (large, small, etc.), level of risk (high,
low, no-risk), mode of operation ( build, build-
operate-transfer etc).
a. Industrial projects also referred as commercial
projects, which are undertaken to provide goods
or services for meeting the growing needs of the
customers and providing attractive returns to the
investors/stock holders.
Industrial Projects includes:
 power plants,
 steel plants,
 fertilizer plants,
 petrochemical and refineries,
 cement plants,
 aluminium plants etc
 Following the background, these projects are
further grouped into two categories i.e.,
a. demand based and
b. resource / supply based.
 The demand based projects are designed to
satisfy the customers’ felt as well the latent needs
such as complex fertilizers, agro-processing
infrastructure etc.
 The resource/ supply based projects are those
which take advantage of the available resources
like land, water, agricultural produce, raw material,
minerals and even human resource.
 Projects triggered by successful R&D are also
considered as supply based.
 Examples of resource based projects include food
product units, metallurgical industries, oil
refineries etc.
 Examples of projects based on human resource
(skilled) availability include projects in IT sector,
Clinical Research projects in bio services and
others.
b. Development projects are undertaken to facilitate
the promotion and acceleration of overall
economic development.
 These projects act as catalysts for economic
development providing a cascading effect.
 Development projects cover sectors like
irrigation, agriculture, infrastructure, health
and education.
 Therefore a development project is designed to
deliver a specific output aiming to improve the
economic and social conditions of a group of
people.
Examples of the type of objectives of development
projects are:
 reduction in child mortality,
 improvement in maternal health, or
 combat of COVID 19, HIV/AIDS, malaria and other
diseases.
Development projects are implemented in some of the
most remote and difficult locations in the world;
additionally, projects operate in areas of high personal
risk and high security threats to project staff.
The lack of proper infrastructure, limited resources,
and a changing environment put a strain on project
managers who need to deliver the project outcomes.
END OF CHAPTER ONE
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