contract costing is a basic method of

What is a contract account? How is it prepared? Discuss the various items that are included in the contract account.

What is a Contract Account?

Meaning of Contract Account:

A Contract Account is a detailed accounting record used to track all costs, revenues, and profits or losses associated with a specific contract or project, typically in industries like construction, civil engineering, and shipbuilding.

Each contract is treated as a separate site of business, and the contract account helps to the find out contractor’s profit :

• Costs incurred (like materials, labor, machinery)
• Work completed (certified and uncertified)
• Revenue earned
• Profit or loss made from the contract

It helps determine the financial performance of each contract and ensures proper control and reporting over long-term or large-scale jobs. contract costing is a basic method of

A Contract Account is a specialized account used in contract costing, which is commonly applied in industries like construction, engineering, or shipbuilding where work is done on a contract basis. It records all costs, revenues, and profits or losses related to a specific contract.

How is a Contract Account Prepared?

This account is usually prepared by a contractor to determine the cost incurred in the contract and find profit or loss from a contract. Each contract is treated separately at the site of business.

The account includes:

1. Debit Side (Expenses Used Costs Incurred):

• Materials Used: Cost of materials issued to the contract.
• Labor Costs: Wages paid to workers on the site.
• Direct Expenses: Any direct charges such as site rent, fuel, or transport.
• Plant & Machinery: Cost of machinery which is used in every site of business, or depreciation if it’s owned.
• Overheads: Share of indirect costs, if applicable.contract costing is a basic method of cost accounting

2. Credit Side (Revenue / Receipts):

• Work Certified: Value of work completed on the contract site and approved by the architecture of the client.
• Work Uncertified: Value of work done but not yet approved.
• Materials Returned: Any excess materials returned to stores.
• Plant Returned: Value of any machinery returned after use.

Additional Items:

• Notional Profit: Calculated as
  Notional Profit=Value of Work Certified + Work Uncertified−Cost Incurred\text{Notional Profit} = \text{Value of Work Certified + Work Uncertified} – \text{Cost Incurred}
• Profit Transfer to P&L: Based on how much of the contract is completed, part of the notional profit is transferred to the Profit & Loss Account.contract costing is a basic method of cost accounting

Stages of Profit Transfer (if work is incomplete):

• < 25% Complete: No profit is transferred.
• 25% – 50% Complete:
  Profit to P&L = Notional Profit ×Cash Received\Work Certified
• > 50% Complete:
  Profit to P&L = Notional Profit ×Cash Received\Work Certified

Here’s a sample format of a Contract Account:

Contract Account for Contract Number XYZ

Notes:

• Work Certified is approved work by the contrattee’s architecture.
• Work Uncertified is completed work awaiting approval.contract costing is a basic method of cost accounting
• Notional Profit = Total credits – Total debits (excluding profit).
• Only a portion of notional profit is transferred to the Profit & Loss Account, based on the stage of contract completion on contract site by the contractor.

Conclusion of Contract Account:

The Contract Account is a vital tool in contract costing, helping businesses track and control the costs and revenues associated with individual contracts. It provides a clear picture of:

• The total cost incurred on a contract,
• The value of work completed,
• And the profit or loss is made on the contract site of that specific contract.
• contract costing is a basic method of cost accounting

By preparing a contract account, companies can assess the performance of each contract, make informed decisions, and ensure that resources are being used efficiently. It is especially useful for long-term or large-scale projects where continuous monitoring is essential. You can check the syllabus of Cost Accounting for BCom-lV sem under the Gndu on the official website of Gndu. contract costing is a basic method of

Important questions of Cost Accounting

1. Why Need for Cost Accounting is Arised Or Limitations of Financial Accounting.
2. Break Even Point Analysis?

contract costing is a basic method of Cost accounting