Project Management

5 Differences Between Project Accounting and Financial Accounting

From the The Money Files Blog
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A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts. Written by Elizabeth Harrin from GirlsGuideToPM.com.

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Categories: accounting


Because yes, they are different. Let’s dive in!

1. The Dates are Different

Project accounting has start and end dates. Your project budget starts when the project starts. The accounting work ends when your project moves through closure and ties up all the contracts and you’re done.

Financial accounting is different. It is based on periods in a financial year. Your financial year will be different in different businesses. Mine starts in May, because that’s when my company was created. For ease, some businesses align their financial years to the tax year (that’s April to April in the UK) or the calendar year (January to December). Whatever works best for you and your team of accountants is OK.

Unfortunately this means that project accounting timetables and financial accounting timetables – what the rest of the business is doing beyond your project – rarely, if ever, align.

2. Reporting Is Based on Different Elements

Reporting in project accounting is based on deliverables. This won’t be news to you. In your project reports you’ll be tracking spend against a certain milestone or a product that you had to buy.

You could also track in a cost breakdown structure against the various deliverables or products that you are creating. Your costs are tied back to the things you are doing, the work you are producing and the output you are creating. It’s very easy to see that buying software licences is linked to the delivery of a new piece of software for the business.

In financial accounting reports, they don’t relate to deliverables. Financial accounting looks at other aspects of running a business, like profit and loss, something that projects don’t much have to worry about.

There’s another difference in the reporting and that’s depreciation. If you are installing assets over a long period of time, as I did on a 18-month software rollout project, your financial accountants will be depreciating the assets behind the scenes. You probably never have to know that this is happening, but it is, based on your company’s defined policy.

On a project, the costs are calculated when invoices are received. If you should be depreciating those assets to spread the cost, it’s done by financial accountants afterwards. I have never met anyone or come across any policy that says this is an expected part of project accounting, so you shouldn’t have to deal with it in your project reports.

3. The Cost Hierarchies are Different

Project accounting hierarchies are based on tasks and projects. Your project costs relate to costs generated by deliverables and project activities.

Rolled up, you can see the costs per project.

Rolled up even further, your programme office can see costs for the programme.

Rolled up even further, your portfolio office can see costs for the business projects overall. They can see which departments have the most project-related spend and cut the project cost data in any way they like.

Financial accounting hierarchies are based on departments and cost centres. You might need to know the cost centres for your work so that you can bill your project costs to the right place. I have worked on a big project with its own cost centre.

But generally the approach financial accounting takes to  drilling down or rolling up is different to how you would look at project-related spend.

4. Comparative Analysis Is Different

Comparing project costs across projects is hard. How is it possible to compare the relative costs of a multi-million pound project with huge benefits to the relatively small costs of upgrading a server for one of your offices? And what would the value in that comparison even be?

It’s possible to compare costs against projects in a meaningful way only if the projects are similar. There needs to be a consistent structure for coding the costs on the project, for example, standard cost codes for expense items.

And it’s important to look at why you would want to do that. It can be interesting to do a comparison across projects if you think you’ll be able to find out more about the financial exposure for the business. It might help you understand what is going on across the business at portfolio level if you are able to split and compare costs like this. And it’s helpful for comparing benefits, where it makes sense for projects to compare their benefits.

Comparative analysis in financial accounting is comparatively easy (see what I did there?). You look back at costs for the previous period or the same period in the previous year. Then spot the differences. Simple, and a lot more meaningful.

5. Level of Understanding is Different

Stakeholders don’t always understand project accounting. Your project sponsor probably has some idea of the fact that you shouldn’t be spending it all in one go, but they probably don’t understand the way that you have to process invoices or the quirks of assigning money to capital. Or perhaps they do. You are bound, however, to come across some project stakeholders who don’t get how to spend money on a project in a way that fits with the rules. These ar the people who want changes done but don’t want to pay for them!

On the other hand, most leaders understand financial accounting principles. These are the things taught on MBAs and on the Finance for Non-Financial Managers courses.

Posted on: October 23, 2017 09:00 AM | Permalink

Comments (8)

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Very Interesting Comparison Elizabeth - Enjoyed going through it. Cheers !

Risk management is also different. Financial risks tend to focus on pure risks, e.g. hazards.

Excellent article Elizabeth learned many new things.

Great summary. Have seen several cases where PM tools were implemented to satisfy accountants and failed to help PMs.

A great article, the biggest difference from my experience is the timeframe. This shows up most in the investment analysis and request for funding which often requires funding over more than one accounting period. Project performance needs to be reported against this period as well.

Your postulations are quite apt, more so for those who aspire to acquire proper knowledge. Many so called experts may never fully appreciate the difference between the two. Thanks for the education.

Good one Elizabeth. Thanks for sharing. I am in project cost control role too and i see the importance of understanding these differences. Also, its is important to reconcile between both project and financial numbers periodically and keep a track it.

Nice Elizabeth, thanks for sharing

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