In most accounting systems, you have what is called a chart of accounts. A chart of accounts is a list of accounts, which are really categories; some for income, some for expenses, some for assets, etc. When someone spends $150 on an ink cartridge for a laser printer, it might be charged to an expense category called "Office Consumables." In a double entry accounting system, it needs to come from an account as well. In our example, let's say it comes from a checking account, which would be an asset account, since it holds real money (one of my favorite assets).
Pretty simple so far.
Let's extend the example a little bit more. Suppose that four months ago, a project began to develop a new product for your company. You're the project manager, and you've been given a budget for the project. Part of your job is to control expenses so that you can see the project to completion within the allotted budget. Remember that ink cartridge? It was purchased for the laser printer used by the engineers to print schematic drawings for the new product. Suppose that in your organization, that expense will be charged to your project.
When you create reports that show the income and expenses that are directly related to your project, you're practicing project accounting. Costs and revenue associated with your project are typically matched up to elements of your work breakdown structure (WBS), so you can have a clearer picture about where the money is flowing. This in turn makes you more effective at managing costs associated with your project.
Does your organization track costs by project? If so, do the software tools (your accounting software, your project management software) in place make this an easy thing to do? We'd love to hear from you on this topic. Write to us at blog (at) steelray.com . . .
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