Why is work in progress (WIP) considered a current asset in accounting?
Accountants consider works in progress (WIP)which are materials and partially-finished goods that await completion, to be current assets, because there’s a reasonable expectation that such items will become marketable products that can potentially convert into cash within one year’s time. Current assets contrast noncurrent assets like long-term notes receivable, and intangible assets like patents.
Understanding Current Assets
In financial accountingcurrent assets include any balance sheet item that a company can convert into cash within one year. This conversion must be affected during the course of routine business operations. Therefore, bankruptcies and other liquidation events would not qualify as current assets. Common balance sheet current assets include:
An Example of a Work in Progress
Work in progress can be readily understood in the context of the manufacturing process. Imagine a warehouse where lumber is used to create tables, chairs, and other wooden furniture items. Although the lumber arrives as raw material, over time, pieces of wood are sized, cut, polished, and assembled. Therefore, the unaltered pieces of wood are deemed WIP, since they will ultimately become salable finished goods, within a year’s time. These marketable products will either result in cash or accounts receivable. In either scenario, accountants would consider the WIP to be a current asset on a balance sheet.