Accounting for Construction Contracts

A contract is a big job requiring considerable length of time to complete and comprising activities to be done outside the factory promises,Accounting for Construction Contracts Articles viz. construction of a dam or school building, laying down railway lines, etc. Special cost and financial accounting is required to maintain the records of construction contracts. Since each contract involves considerable resources both in terms of men and materials, it is necessary to devise an appropriate accounting system to ascertain the cost and profit made on each contract separately.

Profit on incomplete contracts: At the end 상조회사 해약 해지 of an accounting period it may be found that certain contract have been completed while others are still in process and will be completed in the coming years. The total profits made on completed contract say be safely taken to the credit of the profit and loss account. But the same cannot be done in case of incomplete contracts. These contracts are still in process, and there are possibilities of profits being turned into to losses on account of heavy rise in prices of materials and labor and losses on account of other unforeseen contingencies. At the same time it does not also seem desire able to consider the profits only on completed contracts and ignore completely incomplete ones because this may result in heavy fluctuations in the figure of profit from year to year. A year in which a large number of contracts have been completed will show an abnormal high figure for profit while reserve may be the case in the year in which a large number of contracts remain incomplete. Therefore, profits on incomplete contracts should be considered, of course, after providing adequate sums for meeting unknown contingencies.

There are no hard and fast rules for the calculation of the figures for profit to be taken to the credit of profit and loss account. However, the following rules may be followed:

(a) Profit should be considered in respect of work certified only, work uncertified should always be valued at cost.

(b) No profit should be taken into consideration if the amount of work certified is less than 1/4 of the contract price because in such cases it is not possible to foresee the future clearly.

(c) If the amount of work certified is 1/4 or more but less than1/2 of the contract price, 1/3 of the profit disclosed, as reduced but the percentage of cash received from the contractee, should be taken to the profit and loss account. The balance should be allowed to remain as a reserve.

(d) If the amount of work certified is very much near completion, if possible the total cost of completing the contract should be estimated The estimated total profit on the contract then can be calculated by deducting the total estimated cost from the contract price. The profit and loss should be credited with that proportion of total estimated profit on cash basis, which the work certified bears to the total contract price.