What is Project Accounting?

Did you know that, according to the latest project management statistics, poor resource management is the third-ranked reason for project failure?

To avoid going over budget or ending up with an unprofitable project on your hands, you should start taking your project accounting seriously. 

With project accounting, you’ll get a clearer picture of where your project is heading financially. 

By understanding your project’s financial health, you’ll more easily direct your strategy toward success.

Keep reading as, in this guide, we’ll cover:

• Project accounting definition,
• Differences between project accounting and general financial accounting,
• Project accountant job description,
• Advantages of project accounting,
• Who benefits from project accounting, and
• Real-life tips for project accountants.

So, let’s dive in.

What is project accounting?

According to Project Accounting Australia, project accounting is “a specialized form of accounting that focuses primarily on project delivery”.

Project accounting includes activities such as:

• Tracking, 
• Reporting, and 
• Analyzing financial results and implications.

As explained in Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability, project management accounting involves “much more than considering how project income and expense impact the general ledger.” 

Project accounting — sometimes referred to as project financial management — among other things encompasses:

• Traditional accounting, 
• Cost accounting, 
• Budgeting, 
• Financing, 
• Cash flow management, and 
• Earned Value Management.

To sum up, project accounting is a process of recording and analyzing all the financial information in a project.

What’s the difference between project accounting and general financial accounting?

Project accounting and general accounting are similar as they both deal with financial transactions. However, there are some differences between the two. 

To address this topic, we’ve reached out to an expert in the project accounting field — Wendy Ha, the Founder, Principal Consultant, and Advisor at AgileCPA. 

Wendy is a Chartered Professional Accountant (CPA) and Certified Management Accountant (CMA) with over 10 years of experience as a finance and accounting leader. 

In her professional opinion, though some similarities between general and project accountant jobs do exist, there are a couple of differences as well.

Here’s how Wendy defines the general accountants’ role:

And, here’s how Wendy defines the project accountants’ role:

So, let’s sum up the key differences between project accounting and financial accounting:

Difference #1: Scope

General accounting deals with all financial transactions of the entire business, while project accounting reviews only project-related transactions.

Difference #2: Time-frame 

General accounting is done periodically, that is, over defined periods of time (for example, monthly or yearly). Project accounting, on the other hand, relates to shorter time periods or project milestones.

Difference #3: Persons you report to

In general accounting, financial statements are usually presented to stakeholders, while in project accounting, the reports are presented to management.

What does a project accountant do?

To obtain firsthand information about the responsibilities of a project accountant, we once again turn to Wendy Ha.

At one point, Wendy worked in an animation studio where she was responsible for handling 5 projects or animated series.

Here is a list of Wendy’s day-to-day activities as a project accountant at that time:

Wendy personally enjoys the project accountant role because it’s detail-oriented:

Wendy also states that having to stay on top of the project is another important aspect of an accountant’s job:

As we can see from Wendy’s example — working on projects as an accountant — apart from the financial activities, you also need to be familiar with basic project management concepts, such as:

• Project tasks,
• Project milestones, or
• Project deliverables.

Why is project accounting important?

It’s said that there are 3 pillars of project management, the so-called, Iron Triangle of Project Management, which includes:

• Project scope,
• Project time, and
• Project cost.

Project cost or project budget is where project accounting fits in, with a focus on the financial management processes.

Managing projects or programs can often be a challenge for project managers and accountants because they often juggle multiple projects coordinately.

To rise to that challenge and reach the desired goals — a successful project delivery — Wendy recommends that project team members should actively communicate with each other and stay up to date with all the ongoing changes:

Wendy further illustrates the importance of staying informed, with an example from when she worked as a project accountant in the animation industry:

The main benefits of project accounting

Based on the above examples, we can conclude that project accounting plays a vital role in project management, which is why it should be an integral part of it.

To sum up, project accounting is important because it allows you to:

• Monitor incomes and expenses,
• Keep cost and contingencies under control and prevent budget overruns,
• Track project milestones,
• Gain the latest information on the project’s progress,
• Facilitate the decision-making progress with valuable information on the potential issues,
• Help the project team understand the project’s profitability,
• Increase chances of achieving project success, and 
• Identify lessons learned for future projects.

Who uses project accounting?

Project accountants and project managers usually work together to achieve a shared goal — a successful project. 

But, if the project isn’t profitable, it can hardly be called successful.

With that in mind, all projects that track time or cost against milestones should have a project accountant to monitor them.

As explained in the PMBOK® Guide, Construction Extension, industries that usually benefit the most from project accounting are those with projects that result in a one-of-a-kind deliverable with each new contract.

Here are examples of such industries:

• Construction,
• Engineering, 
• IT, and
• Creative industries.

4 Essential tips for project accountants

If you’re still struggling with the basics of project accounting, don’t worry — here are some tips and tricks that will make your project accounting life easier:

1. Have project documents at your disposal,
2. Be flexible with your plan, 
3. Use project accounting systems, and
4. Learn from practice.

Keep reading, as we’re about to cover these tips in more detail.

Tip #1: Have project documents at your disposal

As explained in Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability, information collection is a crucial element in both project management and accounting. 

Correct information and documents facilitate effective decision-making, which is one of the prerequisites for project success.

These are the documents that help you better understand your project’s financial health:

• Project charter,
• Work breakdown structure, 
• Project budget and cash flow, 
• Resource plan,
• Procurement plan,
• Quality plan,
• Project risk response plan, and
• Project status reports.

Proper documentation provides a clear overview of the project and helps you remain realistic with your objectives. 

Our source, Wendy Ha, highlights the importance of fully understanding your project even before the initiation stage: 

Tip #2: Be flexible with your plan

Projects rarely go according to the initial plan, especially in an agile environment. 

Due to the ever-changing nature of projects, it is essential to remain flexible and quickly adapt to those changes. 

To stay in control of your project’s financials — it’s good to have a plan B or even a plan C, if necessary.

Here’s some expert planning advice:

Tip #3: Use project accounting systems

According to the PMBOK® Guide, Construction Extension, the project accounting system should “be similar in structure to the work breakdown structure (WBS), showing the breakdown of the total project in more controllable modules.”

The guide also explains that the size of the project determines the accounting system you should opt for:

• In small and medium-sized projects, you can keep the breakdowns on simple spreadsheet-generated S-curves, while
• Large projects require more sophisticated accounting systems.

Wendy Ha chooses the accounting software depending on the project type and its budget:

Also, using a project management tool and an accounting system simultaneously facilitates understanding the project completely.

Project management software helps you keep track of all project activities and thus stay up to date with the changes.

Here’s what managing a project looks like in Plaky, a project management tool:

As you can see in the example, with a project management app, you can easily access project information at any time, e.g.:

• Task statuses, 
• Task priorities, 
• Task deadlines,
• Task costs, etc.

The access to real-time information facilitates tracking costs and revenues and comparing them with how the project’s progressing.

Tip #4: Learn from practice

Along with courses and books, learning from practical project experience is essential for becoming a successful accountant.  

For that matter, you should embark on your first project as soon as possible. 

Wendy Ha shared with us her journey toward becoming an expert in the project accounting field:

So the most valuable tip is to keep educating yourself about project management and gaining practical knowledge.

Conclusion: Project management and project accounting are tightly related, and together they lead to project success.

In this guide, we have covered the basics of project accounting and given you some real-life expert advice on the topic.

Also, we have concluded that project accounting is tightly related to project management and that they can hardly function separately. 

Due to this strong correlation, project accountants should clearly understand key project management concepts to do their job successfully. 

After all, project accounting provides crucial feedback on your finances, further affecting all important project-related decisions.

Let’s wrap up with this quote explaining the importance of resources: “the strategy of a company must be driven by financials; whatever the company’s mission is, without sound financials, the company cannot succeed” (Callahan et al., 2011).

📖 Project accounting or project financial management is directly related to the management of the budget constraint. To learn more about all the different types of project constraints, who manages them, and how, explore our Project Management Glossary of Terms where you’ll find a range of project management terminology every project manager should be familiar with, from basic to highly advanced.

References

• Callahan, K. R., Stetz, G. S., & Brooks, L. M. (2011). Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability. John Wiley & Sons. 
• Gofman, D. (2020, April 27). What is Project Accounting? Project Accounting Australia. Retrieved January 12, 2023, from https://projectaccounting.com.au/what-is-project-accounting
• Project Management Institute. (2021). The standard for Project Management: A guide to the Project Management Body of Knowledge (PMBOK® Guide). 
• Project Management Institute. (2016). Construction Extension to the PMBOK® Guide. 
• Villanovau.com. (n.d.). Retrieved January 17, 2023, from https://www.villanovau.com/resources/project-management/iron-triangle-project-management/