Today in this article we will be
discussing and understanding the topic Contract costing, parties in contract,
work in progress and treatment of profit or loss in contract accounting. Let’s
begin.
Contract Costing
Contract costing refers to method of tracking
of the cost where the work is undertaken to consumer’s special requirements. Generally
the contracts size is large in size and requires usually at least one year or
more to get complete the contracts. In a contract there must be at least two
parties Contractor and Contractee and Contract price must be involved to form a
contract.
Contractor refers to the person who
undertakes the contract while Contractee refers to the person who gives the
contract and Contract Price refers to the price agreed between contractor and Contractee
for the contract.
Work In Progress(WIP)
Work in Progress refers to the work
yet waiting to get complete in the future. Work in Progress is equal to work
satisfied and work unsatisfied at the end of the contract account. In Contract
accounting the Contractee makes the payment to the contract based on the work
completed. Thus work in Progress is the state which refers to the process of
completion of the project. The value of the WIP at the end of the financial
year is entered on the asset side of the balance sheet.
Treatment of Profit
In Contract Costing treatment of profit under
§ In case of Complete Work
§ In Case of incomplete work
·
Work
Satisfied is less than 25%
·
Work
satisfied is 25% or more but less than 50%.
·
When
the work certified is 50% or more than the contract price
Now let us understand each of the case in treatment of profit
§ In case of Complete Work :
The profit or
loss arising out of the project/contract should be transferred to profit and
loss account.
§ In case of Incomplete Work:
·
Work
Satisfied is less than 25%: In this case
the profit arised should be transferred to reserve profit while if loss takes
place then loss should be transferred to Profit and Loss Account
·
Work
Satisfied is equal to 25% or more but less than 50%: In this case the part of profit is to be transferred to the profit
and loss account by calculating using the formula Cash received divided by work
certified multiplied by 1/3 and remaining profit to be transferred to WIP.
·
When
the work certified is 50% or more: In
this case the part of the profit is to be transferred to P&L account by
calculating the profit using the formula Cash Received divided by Work
Certified multiplied by 2/3 and remaining profit is to be transferred to WIP.
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