Accounting is a recorder of actual circumstances, it is not a predictor or creator of future circumstances nor can it ever gazump contract law. Accounting is an information service to a Business NOT a controller of the Business. @Tut has made several statements which need to be reviewed
“general rule in accrual accounting is to recognize revenue when it is earned” - Yes, but only when you are legally entitled to the revenue. If a contract stipulates an invoicing point then you have no legal right until then otherwise you would be artificially inflating revenue. Large failing corporations did this practice (bringing forward revenue) in the past to hide their true results
Quoting the IRS “in which ALL EVENTS that fix your right to receive the income have occurred” An essential event is the contract stipulation of invoicing date, if that event hasn’t occurred then you don’t have the right to receive the income.
“work in progress is income” Incorrect - refer to point 6.
“performance of the work itself establishes your right to payment” once again incorrect, the terms of the contact determines the right to payment. On that superstition if two weeks work performance had been complete then there would be a right to payment - no, because that doesn’t comply with the contract.
“without showing the work in progress in a temporary income account, the debit to the asset account cannot be matched by a credit” Yes it can please refer to @tony’s post “to a liability account named Deferred Income or Unearned Income”
“This is no different from a manufacturer who has partially completed manufactured goods”. A manufacturer would transfer from Asset - Inventory Raw materials to Asset - Production Work-in-Progress to Asset - Inventory Finished Goods. At no time throughout this process has there been generated a Income Production Work-in-Progress entry. So how is it no different?
Business inputs (raw materials, labour, time, consultants) are Business inputs and you can’t change the accounting process or outcome because of the input. Lets take @jon situation a stage further. Lets assume there is a choice of outsourcing or in-house performance of the contract.
If its outsourced the contractor’s invoice doesn’t create an Income - Billable Work in Progress entry, so why should the in-house performance create an Income - Billable Work in Progress for exactly the same work.
Then we have the tax considerations, why would a business want to inflate its revenues with increased revenues before they are entitled to invoice those revenues. Ok, as @tony states you can make a reconciling adjustment on the tax return or transfer the Work-in-Progress to a liability account, but why have these complications when Manager can address the issue without needing special treatment.
Now for a couple of asides
a) “I think most accountants (and tax auditors) would argue that the right to receive the income was established when the work was performed” If any accountant/auditor put that to me (considering the contract terms) I would seriously be questioning their abilities - why would they advocate artificially increasing one’s taxable income. If any adjustment was to be made, you would transfer any related salary costs from the expense account.
b) “The fact the contract specifies later billing is immaterial” Tell that to a Judge. Accounting doesn’t gazump contract law. If one is going to put accounting above (superior to) the contract, then the role of accounting is not clearly understood
c) “IRS Publication 334 includes changing billing rates and uncertainty in pricing” Neither changing billing rates or uncertainty in pricing are at issue here so these clauses are completely irrelevant.
d) “A liability account is not considered a contra asset account” Incorrect, accounting standards requires finance leases (equipment, vehicles) to be fully taken up in the balance sheet, this involves an asset and corresponding (contra) liability account.
@jon asked “Is there an accounting reason why Billable time in progress can’t be debited to an asset and credited to a liability (contra-asset) account?” The simple answer is there is no reason why it can’t happen - but it would appear in Manager you will need to journal it to correct your accounts.