Learning Materials For Accounting, Management , Finance And Economics.

Thursday, October 14, 2010

Concept Of Contract Account

The need of a contract account is obvious as the financial accounting does not report distinctly the cost of a contract and the profit earned from the contract work. Under contract costing, a separate contract account is prepared for each contract work undertaken. A contract account so prepared separately provides an opportunity to check the performance of each individual contract. The contract account maintained annually by a contractor determines the annual contract cost and consequently profit for each contract separately. For this purpose, costs incurred in the form of material, labor and expenses for contract work are debited to a contract account. It is credited by the work-in-progress value of an incomplete contract or a contractee's account with a contract price on the completion of the contract work. The difference between debit and credit represents a profit or loss. Such a profit or loss is transferred to the profit and loss account of the year after making necessary adjustments as per the established norms of profit recognition.