This is one of the hardest topic in Accounting. To make it easier I have prepared this one. It is according to AS 7. These are some of the basics of Contract Accounting. How to account Contact? Like if it proves to be useful for you.

2. COSTING
“The technique and
process of
ascertaining costs.”
Contract
Costing
Batch
Costing
Single
Costing
Process
Costing
Job Costing
Operating
Costing
Multiple
Costing

3.  Contract Costing is defined by the ICMA
Terminology as

4.  Each contract is treated as a cost unit.
 A separate account for each contract.
 Work is done at site, away from contractor’s own
premises.
 The contract has a long duration usually extending more
than one accounting year.
 All items of cost which are directly related to the contract
are chargeable to respective contract accounts.
 Payment is made by contractee on the basis of work
certified by surveyor or architect.
 Penalties or extra money may be imposed.
 Though contract costing is a part of Cost Accounting, but
it is purely based on the principles of Financial
Accounting. Such as Dual Aspect, Prudence and
Conservatism. And AS9 (Revenue Recognition)

5. • Fixed Price is agreed
• Deductions are made for Defectives and Penalties
• Extra money for additional work
Fixed Price Contract
• compensates for costs actually incurred by contractor.
• a percentage of cost or any lump sum amount.
Cost Plus Contract
• Mixture of both of the above.
• A fixed price will increase with increase in cost of material,
labour.
Contract with Escalation Cost

6.  Land Cost
 Site labour Cost
 Cost of material
 Depreciation on plant and equipments used at site
 Sub Contract Cost
 Cost of moving plant
 Cost of hiring Plant & Machinery
 Cost of design
 Maintenance Cost
 Guarantee & Warrantee Cost
 Penalties, etc.

7. × General Administrative Cost
× Selling Cost
× Research & Development Cost
× Depreciation on ideal plant & equipment
× Cost of unconsumed material
× Advance payment to sub contractor
× Cost of material which is delivered to site for
future
× Profit/Loss on sale of any material/plant

8. Can you Say how
much work
has been
completed ???
Can you Say how
much work
has been
completed ???
New Building of
Central Bank,
Europe

9.  “Work Certified is that
proportion of the work
completed which has
been certified or and
valued by the architect
or surveyor.”
 Payment is made on the
basis of Work Certified.
 “Work Uncertified is
that part of the work
completed which has not
been certified/approved
by the contractee’s
architect or surveyor.”
 There is no role of Work
Uncertified in payment.
Accounting Treatment is same for both:
Work-in-Progress A/c Dr.
To Contract A/c

10. 01/04/2015 – 31/03/2016
(ONE FINANCIAL YEAR)
01/04/2015
1.Starting of year
2. Starting
/continuation
of contract
31/10/2015
Assessment done
by Architect or
Surveyor and
certified the
work done, i.e.
work certified
31/03/2015
1.Ending of year
2. Date of
payment
3. Closing of
account of
incomplete
contract
Work Done and certified
Work Done but not
certified
WORK
CERTIFIED
WORK
UNCERTIFIED

11.  A Contractor does not receive full payment of the
Work Certified by the surveyor.
 Contractee retains some amount to be paid, after
sometime, when it is ensured that there is no fault in
the work carried out by contractor.
 This retained money is called as Retention Money.
Retention Money= Value of work Certified
(-) Payment actually made

12. Particulars Amount Particulars Amount
To Material Purchased XXX By Work-in-progress:
Work Certified
Work Uncertified
XXX
XXX
To Material received from
stores XXX
By Material Return to
Stores XXX
To Material from other
contract XXX
By Material sent to other
contract XXX
To Wages XXX By COST of Material Sold XXX
To Indirect Expenses XXX By Material on Hand XXX
To Plant & Machinery XXX By Plant on Hand XXX
To Accrued Wages XXX
To Accrued Expenses XXX
To Notional Profit c/d XXX
XXX XXX

13. If Profit,
Transferred to Credit
side of P&LAccount
If Loss,
Transferred to Debit
side of P&LAccount
If Profit,
1 Part Transferred to
Credit side of P&L
Account as per the
work Completed
Another to WIPA/c
If Loss,
Transferred to Debit
side of P&LAccount

14. As per the % of Work Completion, 3 stages of work completed
is made which helps in transferring the amount to P&L Account.
Stage Name
% of Work
Completion
Formulae
Initial Stage 0% to 24% No Profit will be transferred to P&L
Work done but
not Substantial
25% to 49%
Substantial
Work Done
50% to 100%

15. LIABILITIES Amount ASSETS Amount
Work in Progress:
XXX
Work Certified XXX
Costing P&L Account
XXX
(+)Work
Uncertified XXX
Contractee A/c XXX (-) Cash Received (XXX)
Unpaid Expenses XXX (-) WIP Reserve (XXX)
Unpaid Wages
XXX
Plant in Hand
(Less Depreciation) XXX
Material on Hand XXX
Cash XXX

16. Shubham Verma
varma.shubham0365@gmail.com