What happens to the $85,000 piece of test equipment the government shipped to your facility three contracts ago? It sits on a shelf in the back warehouse. Nobody remembers which contract funded it. The property tag fell off two years ago. And nobody told the bookkeeper it needed to appear anywhere in the accounting system.
At closeout, the contracting officer asks for a complete government property inventory. The answer determines whether the contractor receives final payment or enters a liability dispute over missing, damaged, or unaccounted government assets. The accounting system has no record. The property management system (if one exists) was last updated when the equipment arrived.
Government-furnished property and contractor-acquired property create parallel accounting obligations outside the standard cost accounting framework. Government property accounting under FAR Part 45 requires contractors to establish property records, conduct physical inventories, report losses, and manage disposition for every government-owned item in their possession. The property tracking requirements, accounting entries, and audit exposure points below apply from the day government property arrives at your facility through contract closeout.
Two Categories of Government Property in Contractor Accounting
Government property accounting starts with classification. FAR 45.101 defines two categories, and the accounting treatment differs for each. Government-Furnished Property (GFP) arrives from the government: equipment, materials, special tooling, or facilities provided under the contract for the contractor’s use. Contractor-Acquired Property (CAP) is purchased by the contractor using contract funds, with title vesting in the government upon acquisition or as specified in the contract.
GFP appears nowhere on the contractor’s balance sheet as an owned asset because the contractor does not own it. The obligation is custodial: track it, maintain it, protect it, and return or dispose of it per government direction. CAP starts as a contract cost (direct material or equipment) and transfers title to the government. The cost hits the contractor’s books. The property accountability belongs to the government.
Both categories require the same record-keeping: item description, quantity, acquisition cost, location, condition, contract number, and disposition status. The DCAA-compliant accounting system must track these items separately from contractor-owned assets.
Property Records: What FAR 45 Requires
FAR 45.202 requires contractors to establish and maintain an acceptable property management system. The system must provide for receipt, identification, records, physical inventory, subcontractor control, reports, relief of stewardship, and disposal of government property. DCMA (Defense Contract Management Agency) audits property systems under DFARS 252.245-7003.
The property record for each item must include: the contract number, a description adequate for identification, quantity received or acquired, unit acquisition cost, unique item identifier or equivalent, location, disposition, and posting reference. For items above the capitalization threshold ($5,000 under FAR 45.101), the record must also include the date of acquisition and method of acquisition.
In QuickBooks, most small contractors track government property through a dedicated memorized report or a separate register outside the general ledger. Government property does not appear as the contractor’s asset. Track it in a property log with the required fields, reconciled quarterly to the physical inventory.
Government Property Accounting Entries
The journal entries for government property accounting depend on the property category. GFP requires no cost entry at receipt because the contractor incurs no cost. Record receipt in the property management system (the tracking log) with the acquisition value, contract number, and date received. The only general ledger impact occurs if the government property is lost, damaged, or destroyed, creating a potential liability.
CAP generates a standard cost entry: debit direct materials or equipment (contract cost), credit accounts payable or cash. The cost flows through the contractor’s incurred cost submission as an allowable direct cost. Simultaneously, record the item in the property management system because title belongs to the government despite the contractor purchasing it.
Loss or damage to government property requires immediate notification to the contracting officer and a potential liability entry. If the contractor is liable (through negligence or willful misconduct), accrue the estimated replacement cost or repair cost as a direct cost against the contract. If the loss is not due to contractor fault, the government bears the cost and no liability entry is required.
Physical Inventory Requirements
FAR 52.245-1 requires contractors to conduct physical inventories of government property in their possession at intervals established in the property management system, but no less frequently than every two years. Many contracts specify annual inventories. The inventory must reconcile to the property records, and discrepancies require investigation and reporting.
The physical inventory is a reconciliation, not a count. For each item in the property records, verify physical existence, condition, and location. For each government-tagged item found on-site, verify it appears in the records. Discrepancies in either direction (records without property or property without records) require written explanation and submission to the property administrator.
Inventory results feed the accounting system when adjustments are needed. A missing item triggers loss reporting under FAR 52.245-1(j). A damaged item triggers a condition reclassification and potential repair cost accrual. Both create documentation requirements the bookkeeper must coordinate with the property administrator.
Disposition and Contract Closeout
Government property disposition is the final step before contract closeout. The contractor must submit an inventory schedule listing all government property in their possession, its condition, and a recommended disposition (return to government, transfer to another contract, or request for abandonment/destruction). The contracting officer directs the disposition.
Closeout cannot complete until all government property is accounted for and dispositioned. A $500 hand tool missing from the property records halts the same closeout process as a $500,000 piece of equipment. The contract closeout guide covers the full process. Government property disposition is the step most contractors delay until the last minute, creating the closeout bottleneck.
The accounting entries at disposition: if property is returned to the government, remove it from the property log with a disposition record. No general ledger entry needed because GFP was never on the books. For CAP returned to the government, the cost has already been expensed to the contract. Document the return and update the property record. For property the government abandons in place, document the abandonment authorization and remove from the tracking system.
Common Government Property Accounting Mistakes
Property audits under DFARS 252.245-7003 reveal recurring patterns in how contractors fail to meet FAR 45 requirements. Five mistakes generate the majority of property system disapprovals and contract closeout delays.
- No property management system at all. The contractor receives GFP, uses it on the contract, and maintains no record of its existence. At closeout, the contracting officer asks for the inventory. The contractor starts from zero.
- Commingling government and contractor property. Government-furnished equipment mixed into the contractor’s general inventory without separate tagging, tracking, or storage. Identifying which items belong to the government becomes impossible without a physical audit of every serial number.
- Missing or incomplete property records. The tracking log exists but lacks required fields: no acquisition cost, no contract number, no condition codes. DCMA rejects incomplete records during property system reviews.
- Physical inventory not performed. The contract requires annual inventories. Three years pass without one. Discrepancies compound. Items move between facilities. Staff turnover erases institutional knowledge of where things are.
- Loss reporting delayed or omitted. An item breaks or disappears. The project team replaces it from contractor stock without telling anyone. The property records show an item that no longer exists. The loss reporting requirement under FAR 52.245-1(j) was never triggered.
Frequently Asked Questions
Does government-furnished property appear on the contractor’s balance sheet?
No. GFP belongs to the government and is not the contractor’s asset. Track it in a separate property management system with the required FAR 45 fields (description, quantity, cost, location, condition, contract number). The general ledger is only affected if GFP is lost or damaged and the contractor is liable for replacement or repair costs.
How often must a contractor inventory government property?
At least every two years under FAR 52.245-1, though many contracts specify annual inventories. The inventory is a full reconciliation: verify every recorded item physically exists and verify every government-tagged item on-site appears in the records. Report discrepancies to the property administrator with written explanations.
What is the difference between GFP and contractor-acquired property?
Government-Furnished Property (GFP) is provided by the government for the contractor’s use. Contractor-Acquired Property (CAP) is purchased by the contractor with contract funds, with title vesting in the government. GFP creates no cost entry. CAP generates a direct cost charge to the contract. Both require identical property records under FAR 45.
What happens if government property is lost or damaged?
Report the loss immediately to the contracting officer under FAR 52.245-1(j). If the loss resulted from contractor negligence, the contractor bears the replacement or repair cost as a contract charge. If the loss occurred without fault (fire, natural disaster, normal wear), the government absorbs the cost. Document the circumstances regardless of fault determination.
How does government property affect contract closeout?
Closeout halts until all government property is accounted for and dispositioned. The contractor submits an inventory schedule with condition and recommended disposition for every item. The contracting officer directs return, transfer, or abandonment. Missing items trigger investigations and potential liability. Start the disposition process 90 days before expected contract completion.
Key Takeaways
- Government property accounting under FAR 45 runs parallel to cost accounting. GFP never appears on the contractor’s balance sheet. CAP flows through contract costs but title belongs to the government. Both require the same property records: description, quantity, cost, location, condition, contract number, and disposition status.
- Physical inventories are reconciliations, not counts. Verify every record against physical existence, and every physical item against the records. Perform at least every two years (FAR 52.245-1). Discrepancies require written investigation and reporting to the property administrator.
- Contract closeout cannot complete until all government property is dispositioned. A $500 missing item blocks the process identically to a $500,000 item. Start disposition planning 90 days before contract completion. The late start is the single most common closeout delay.
- Five property system mistakes drive the majority of DFARS 252.245-7003 disapprovals: no tracking system, commingled property, incomplete records, skipped inventories, and unreported losses. All five are preventable with a property log maintained from contract day one.
Government property creates accounting obligations from receipt through disposition. The contractors who treat it as a warehouse problem instead of a books problem discover the gap at closeout, when it costs the most to fix. Run the Compliance Readiness Check to evaluate your property tracking against FAR 45 standards. Holding government property or starting a contract with GFP? Book a discovery call with our CPA-managed team.
