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Contract

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Muhammad Usman Akram
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9 views

Contract

Uploaded by

Muhammad Usman Akram
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPSX, PDF, TXT or read online on Scribd
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Contract

"making an agreement in
business to do certain
work for consideration"
Generally a contract may be for the
construction of a building, road, a ship or a
complicated piece of machinery etc
Major Parties Involve

contractor contractee

person who agrees to person for whom some


do certain work for someone work is being done

Builders, Civil Engineering Government, Public & Private


Contractors, Constructional Organization
and Mechanical Engineering
Firms, and similar concerns
Contract Accounting

"the systematic recording of the work


done under each contract for a third
party in consideration who agrees to
pay a fixed sum of money at completion
of full work or part payment after the
work is completed partially and is being
certified / approved by the architect or
surveyor"
Material
Material Labour
Labour

Major Costs
Should Be
Record

Machinery
Machinery Adminstrative
Adminstrative
When a contractor have
several contracts on hand

open a separate account for each contract


undertaken

wages, material and expenses will have to


be separately recorded for each
otherwise it will be difficult to know the total
cost of completing a particular contract
Costing Of A Contract
Plant & Machinery
if any special plant and tools have been supplied for the
purpose of the contract, then full value of such plant and
tools should be debited to the contract account
on completion of the contract, if the plant and tools used
thereon are still useful for other purposes, they will revalued
and that value will be credited to the contract account, the
corresponding debits being given to Plants and Tools
Accounts with there respective values
contract account will stand debited with the depreciation in
the value of the plant and tools due to their use
Another way of recording Plant and Tools use, the
depreciation of that plant and tool will be debited to Contract
Account.
Costing Of A Contract

Cost of materials
contract account should be debited with the cost of materials
purchased specifically for the purpose or supplied from own
stores

Cost Of Labour & Adminstration


wages and other direct expenses incurred on each particular
contract also be debited to that account

Cash Received
the amount received from the contractee on the account of
the contract should be credited to the Contractee's Personal
account
Escalation clause
The clause provide that in case prices of item
of raw materials, labour etc. specified in the
contract, change during the execution of the
contract, contract price will be suitably
adjusted.

The terms of the contract specify the


procedure for calculating such adjustment in
order to avoid all future disputes
If the contract is completed in
the same accounting year in
which it is commenced

the full contract price will credited to the contract


account as soon as the contract is completed, and
debited to contractee's personal account.

the balance on contract account will now show


profit or loss on the completed contract, which will
be transferred to profit and loss account
Contract Account
Date Particulars Rs. Date Particulars Rs.
Material Material on Site

Wages Machinery
Less Depreciation
Machinery
Contractee Account
Administrative
Expenses

Profit on
Contract
(Balance)
If the contract is not completed in
the same accounting year
Work Certified
the architect of the Contractee from time to time issue
certificates for work done when he check at fix intervals

these certificates on account of each contract should be


numbered consecutively and field carefully for reference

the contractor is to be paid by the contractee 70 to 90 percent


of the value of each such certificate

the balance being retained as a guarantee against fulfillment


on the contract within the stipulated time and to be paid on
completion
Work Uncertified

It may be quite possible that at the end of a period a part of


work done may remain unapproved

Such work which has not been so far approved by contractee’s


architect is termed as Work Uncertified

It is valued at cost and credited to the contract account and


debited to work in progress account
Profit on Incomplete Contracts
Profit should be considered in respect of work certified only,
work uncertified should always be valued at cost

Work Certified < ¼ of Contract price = No profit should be


taken

Work Certified > ¼ but < ½ of Contract price = 1/3 of profit


reduced by percentage of cash received should be taken to
Profit & Loss Account
Balance Should be treated as reserve

Profit Transferred =
Estimated Profit X 1/3 X Cash Received for Work Certified %
Profit on Incomplete Contracts
Work Certified > 1/2 of Contract price = 2/3 of profit reduced by
percentage of cash received should be taken to Profit & Loss
Account
Balance Should be treated as reserve
Profit Transferred =
Estimated Profit X 2/3 X Cash Received for Work Certified %

In case the contract is very much near completion, if possible


total cost of completing the contract should be estimated
Total Profit can be calculated as
Total Profit = Contract Price – Total Estimated Cost

Profit Transferred will be


Total Estimated Profit X Work Certified / Contract Price x Cash
Received for Work Certified %
Contract Account
Date Particulars Rs. Date Particulars Rs.
Material Material on Site
Wages
Machinery Machinery
Administrative Less Depreciation
Expenses
Work In Progress
Profit c/d Work Certified
Work Uncertified

_____ _____
Profit & Loss Profit b/d
Account
Work In
Progress
(Reserve)

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