Project accounting
Project Operations delivers a connected business solution complete with world-class project accounting capabilities for financial management at every project phase. While the project team records time, expenses, and other transactions that are associated with the project, the project accountant ensures that these transactions are accurately accounted and recorded in the project subledger and general ledger.
Accounting options for billable projects
Project Operations supports various accounting options for billable projects that include time and material and fixed price transactions.
Time and material transactions - These transactions are invoiced as the work progresses based on the consumption of hours, expenses, items, or fees on the project. These transaction costs can be matched with the revenue on each transaction and the project is invoiced as work progresses. Project revenue can be also accrued at the time when the transaction occurs. During invoicing, revenue is recognized and, if applicable, accrued revenue is reversed.
Fixed-price transactions - These transactions are invoiced according to a billing schedule that is based on the project contract. Revenue for fixed price transactions can be recognized at invoicing or calculated and posted periodically, according to the Completed contract or Completed percentage methods.
A project is considered billable when it is associated with one or more contract lines. A project contract line defines which billing method and transaction types are allowed.
Accounting options for internal projects
Internal projects allow companies to track cost that is related to activities that are not being billed to a customer. Examples of internal projects include:
- Developing a product, such as a mobile app, and tracking the cost that is associated with the development.
- Managing pre-sale time and expense. This pre-sale internal project can be converted later to a billable project if the quote is won.
Any project that is not associated with a contract in Project Operations is treated as internal. Project cost and revenue profiles are not used to determine accounting rules for the project. Internal project cost is always posted by using profit and loss principles. Ledger accounts for postings are defined on the Ledger posting setup page.
- Time transactions are posted by debiting the Cost account and crediting the Payroll allocation account.
- Expense transactions are posted by debiting the Cost account and crediting the Offset account for expense.
After transactions are posted to the project, if the project is associated with a project contract, the system reverses all accumulated transactions and creates new billable transactions. The billable transactions follow the accounting rules that are defined in the Project cost and revenue profile.
Process project costs and unbilled sales with the integration journal
Time and expense entries create Actual transactions that represent the operational view of work that is completed against a project. Project Operations provides accountants with a tool to review transactions and adjust the accounting attributes, as needed. After the review and adjustments are complete, the transactions are posted to the Project subledger and General ledger.
Records in the Project Operations Integration journal are created by using a periodic process called Import from staging table. When the periodic process runs, any actuals that are not yet added to the Project Operations Integration journal are found and a journal line for each actual transaction is created. When you post the integration journal, a project subledger and general ledger transactions are created. These transactions are used in downstream customer invoicing, revenue recognition, and financial reporting.
Financial dimensions
Project Operations uses the Financial dimensions framework in Dynamics 365 Finance to provide additional insights on project subledger and general ledger transactions. Default financial dimensions can be set on a customer, project funding source, milestone, project contract line, or project. Financial dimension defaults are managed in the Default accounting slider that can be accessed from the Project contract or Project page. When project transactions flow to the Project Operations Integration journal, financial dimension defaults are applied and are available for the accountant to edit, as needed, by using the Distribute amounts form. As the system posts transactions to the project subledger and general ledger, it is possible to analyze project financial performance based on these financial dimensions.
Project categories
Project Operations can categorize revenue and expenses on projects. Categories provide the ability to report on and analyze project transactions and drive posting to the general ledger.
The following diagram illustrates the correlation between transaction categories, shared categories, and project categories.
Transaction categories are the basic grouping for project transactions. Within that grouping is a set of categories that can be shared across applications and modules. Project categories are specific to legal entity, module, and application.
Shared categories will sort expenses into different applications, such as Finance, Supply Chain Management, and Project Operations. For each Transaction category that is created, Project Operations automatically creates four related Shared categories:
- Hours
- Expense
- Fee
- Item
Project categories represent the most granular level of category configuration and must be configured separately, and for each company, by a project accountant.
Revenue recognition
In Project Operations, revenue recognition principles vary depending on the selected billing method for a project or portion of the project.
Transactions accounted with the time and material billing method
When transactions are accounted by using the time and billing method, the following actions occur:
Cost and revenue recognition are connected. Transaction cost and unbilled sales are posted by using the Project Operations Integration journal.
Project cost and revenue profile determine if unbilled sales transactions are posted to the general ledger. If Accrue revenue is selected, the system uses the WIP sales value and the Accrued revenue sales value accounts during posting. The following figure is an example of this method.
Transaction type Debit/Credit Amount WIP Sales value Debit 100 Accrued revenue sales value Credit 100 Revenue is recognized during invoicing. The system uses the Invoiced revenue account during posting. The following figure is an example of this method.
Transaction type Debit/Credit Amount Customer balance Debit 120 Sales tax payable Credit 20 Invoice revenue Credit 100 If revenue was accrued when the unbilled sales are posted, the system will reverse the accrued revenue at invoicing.
Transaction type Debit/Credit Amount Accrued revenue sales value Debit 100 WIP Sales value Credit 100
Transactions accounted with the fixed price billing method
When transactions are accounted by using the fixed price billing method, the following actions occur:
Cost and revenue recognition are separate. Transaction cost is posted by using the Project Operations Integration journal. Unbilled sales transactions are not created.
Revenue can be recognized during invoicing if the project cost and revenue profile have Principle used for project completion calculations set to No WIP. Only use this method for short term, simple projects.
Revenue can be recognized by using fixed price revenue estimates, with either the Completed contract or Percent completion revenue recognition method.
Learn more about project accounting in the Get started with project accounting in Dynamics 365 Project Operations module.