Cost and Management Accounting I.
In the first method, the contract account is credited with the value mentioned in the certificate and personal account of the contractee is debited. Cash received is credited with the contractee’s account and the balance is shown as a debtor representing the retention money.
II. In the second method, the contract account is credited with the value of the certificate and the contractee’s account is debited with amount payable immediately and a special retention money account is debited with the amount so retained. Treatment of Profit on incomplete Profit: Several contracts take more time than one financial year before they are complete. The questions arises as to whether the profits on such contracts should be taken into consideration after the completion of the contract or whether a portion of the same should be taken into accounts every year on certain basis. If profit is taken into consideration after the completion of contracts and if in a single year several contracts are completed, the profits shown will be very high while in another year, if none of the contracts are completed, amount of profits shown will be very low. Thus there will be distortions in the amount of profits. Therefore it becomes necessary to compute the amount of profit on partly completed contracts and take credit of appropriate amount in the profit and loss account by using the following guidelines. Value of certified work only should be taken into consideration while determining the profit. Value of work not certified should not be taken into consideration. In case of contracts which are less than 25% complete, no profits should be taken into consideration and consequently no credit should be taken to Profit and Loss Account. In case of contracts which are more than 25% complete, but less than 50% complete, the following method should be used for computing the profit to be credited to the Profit and Loss Account. 1/3 Notional Profit/ Cash Received/Work Certified. Notional profit is the difference between the value of work certified and cost of work certified. It is computed in the following manner. Notional Profit = Value of work certified – [cost of work to date – cost of work completed but not certified] In case of contracts complete between 50% and 90% [more than 50% but less than 90%] the following method is used for computing the profit to be credited to the Profit and Loss Account. 2/3 Notional Profit X Cash Received/Work Certified In case of contracts completed 90% or more than that, it is considered to be almost complete. In such cases, the estimated total profit is first determined by deducting the total costs to date and additional expenditure necessary to complete the contract from the contract price. The portion of profit so arrived is credited to the Profit and Loss Account by using the following formula. Method I:- Estimated Profit Work Certified /Contract Price Method II:- Estimated Profit Work Certified /Contract Price Cash Received/Work Certified or Estimated Profit Cash Received/Work Certified. The method II is preferable to the first one. In case, additional expenditure to complete the contract not mentioned, the amount of profit to be transferred to the Profit and Loss Account is determined using the following formula. Notional Profit Work Certified/Contract Price
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