Contact Account for B. Com

 

Contract Account

Contact account is opened for each contract by a contractor to find any profit or loss on this contract. In case more than one contract is running, a serial number is assigned to each contract which is known as contract account.

Explanation of contract account:

·       Typical items that appear on debit side of contract account are as follows:

 

1. Work in progress from preceding year i.e. work certified & work uncertified ( in case of incomplete contract)

2. Material purchased directly

3. Material issued from store

4. Transferred in from other contract

5. Wages of direct labor

6. Wages of workers working on many contracts (apportioned on some equitable basis)

7. Direct expenses e.g. hire charges of special plant, carriage on material purchases, travel expense related to contract, etc.

8. cost of sub contact

9. cost of special plant ( including installation charges of special plant)

10. Depreciation of General Plant

11. Indirect expenses e.g. store ore office expenses (apportioned on some equitable basis)

12. expenses accrued or outstanding at the end of accounting period

Typical items that appear on credit side of contract account are as follows:

1. Material returned to supplier

2. Material returned to storeroom

3. Plant returned to storeroom

4. Material transferred to other contract

5. Material/ plant stolen, destroyed (Charged to profit & loss account)

6. Material in hand

7. Plant in hand  i.e. special plant at depreciated value

8. Loss  on sale of material (Charged to profit & loss account)

9. Loss on sale of plant i.e. special plant (Charged to profit & loss account)

10. Contract price (In case of completed contract)

11. Work in progress i.e. work certified & work uncertified ( in case of incomplete contract)

Retention Money:

      Generally, the terms of contract specify that whole amount is not paid by the contractee until the completion of the contract or completion of the guarantee period. Any percentage or amount retained is called retention money.

Contract Account

Typical Format of Contract Account

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Profit on Completed Contracts:

    In case  of completed contract, the full price of the contract is shown on the credit side of the contract account, whether the full price has been received or amount to be received in instalments. Sometimes, as per agreement the contractor agrees to make good of any defects during guarantee period. If during such period any defects are found and the contractor bear some cost to rectify these defects, then this cost will also be debited to the contract account to ascertain the actual profit or loss made on the contract.

Profit on Incomplete Contracts:

    1. If work certified is less than 25% of the contract price, then no profit is to be transferred to Profit & Loss Account.

   

    2. If  work certified is 25%  to below 50% of the contract price, then the following profit may be carried forward to Profit & Loss Account:

   = Notional Profit x 1/3 x (Cash Received / Work Certified)

        3.  If work certified is 50% or more than 50% but the contract is not nearing completion, then the following profit may be carried  f forward to Profit & Loss Account:

       = Notional Profit x 2/3 x (Cash Received / Work Certified)

        4. In case of contract nearing completion:

         = Total Contract Price - (Cost incurred to date +  Estimated                 Cost yet to be incurred)

 

Notional Profit:

Value of Work Certified                xxxxx

        Cost of Work not Certified             xxxxx          

                                                       xxxxx

Less: Total Costs incurred to date  xxxxx

Notional Profit:                               xxxxx

Relevant Accounting Standard:

IAS 11

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