Why is work in progress (WIP) considered a current asset in accounting?

Accountants consider work in progress (WIP) to be a current asset because it is a type of inventory asset. Accountants consider inventory assets to be current, because they are reasonably expected to be converted into cash within one year's time.

Some accountants distinguish between WIP with work in process. Work in process represents the intermediary stage between raw materials and finished goods, while WIP includes the development of long-term (noncurrent) assets. This is atypical, however, and most references to work in progress allude to a stage of inventory asset.

In financial accounting, current assets include any balance sheet accounts with assets that the company can convert into cash within one year. This conversion needs to be during normal operations; liquidation due to bankruptcy wouldn't count, for instance.

Common types of current assets on the balance sheet are cash, short-term notes receivable, prepaid expenses and marketable securities. Almost all inventories are considered current assets.

Current assets are contrasted with noncurrent assets, such as long-term notes receivable. Intangible assets are also noncurrent; a business cannot liquidate patents or goodwill.

It's easiest to explain work in progress within the context of a manufacturing process. Imagine a warehouse where lumber is used to create tables and chairs. The lumber arrives as raw material, unchanged by the production process inside the warehouse. Over time, pieces of lumber are sized, cut, polished and joined together. These materials are considered WIPs. Once a good is considered ready for sale, it becomes a finished good.

Most production processes take less than one year to complete. A complete finished good can be sold for cash or an account receivable. Consequently, accountants can consider WIP to be a current asset on the balance sheet.