Contract Costing

Windsor Shelters 1
Contract Costing
A
Project Report
On
THE CONTRACT COSTING
Submitted by
MD RASHID HUSSAIN
(M.Com-Part II)
SUBMITTED TO
UNIVERSITY OF PUNE
IN THE PARTIAL FULFILMENT FOR THE DEGREE OF MASTER OF
ADVANCE COST ACCOUNTING
UNDER THE GUIDANCE OF
Dr.ABBAS LOKHANDWALA
M.Com;M.Phil;MMS;Ph.D
Poona College
PUNE
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Contract Costing
PREFACE
This project is prepared as a part of the syllabus for the Masters Degree in
Advance Cost Accounting. I have prepared this report on the basis of 2months
recruitment and selection program at WINDSOR SHELTERS.
In this report I have mainly stressed on the point for the need of Contract
procedures and allocation of work. The WINDSOR SHELTERS itself being one
of the most recognized measuring units in Pune has helped many young
aspirants to make their dreams come true by giving them knowledge and
develop their skills.
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Contract Costing
DECLARATION
I the undersigned, Mr. Md Rashid Hussain student of Poona College. A hereby declare that
this project work entitled on CONTRACT COSTING has been completed under the
guidance of Prof. Abbas Lukhandwala.
It is my original work and has not been copied from any other source or project work
submitted to the University
Place :
Date
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Contract Costing
ACKNOWLEDGEMENTS
Any accomplishment requires the help and efforts of many people and
conducting this research was no different.
First and foremost, I would like to thank ' Poona College Arts Sci &
Commerce for giving me the opportunity to present this report on "A Study of
CONTRACT COSTING WITH REFERENCE TO WINDSOR SHELTERS
Further, I would like to thank Dr.Abbas Lokhandwala my project guide for
their constant guidance and encouragement. Without their support and
assistance, conducting this research would not have been possible.
I would also like to thank Mr.Dhanwal, Administration and site manager of
Windsor Shelters Organisation, without whose cooperation, my research would
not have been realistic.
Last but not the least; I would like to thank my family and friends for
supporting me throughout the duration of conducting this research. I wish to
express my gratitude to every person who has contributed to this project, though
anonymously
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Contract Costing
INDEX
CHAPTER
TOPIC
Chap 1
Chap 2
Chap 3
Chap 4
Chap 5
Chap 6
INTRODUCTION OF THE STUDY

COMPANY PROFILE
REVIEW OF LITERATURE
RESEARCH METHODLOGY
DATA ANALYSIS
Chap 7
SUGGESTION & RECOMMENDATION
Chap 8
CONCLUSION
Chap 9
Chap 10
BIBLIOGRAPHY
PAGE No.
FINDINGS
ANNEXURE
CHAPTER: 1
INTRODUCTION
The term 'contract' refers to the agreement between two parties to carry out a certain wok in a
specified period of time. A contract is generally related to a large size with high amount of
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Contract Costing
money and performed at site. There are two parties involved in a contact namely the
contractor and the contracted. The person or party executing the contract under certain terms
and conditions is called the contractor. Similarly, the person or party to whom the work or job
is executed is known as the contracted. The contract and the contracted make an agreement to
get the work done against a certain sum of money which is called the contract price. A
contract is generally related to contraction of building, dam, bridge, road, plants etc.
ICMA defines. "Contract costing is that form of specific order costing which applies where
work is undertaken to customer's special requirements and each order is of long-term
duration."
Contract costing is a form of job costing in which a separate ledger i.e. contract ledger is
maintained for each job. It is also known terminal costing as the contract account is remained
or closed after the completion of the work or contract. The main objective of the contract
costing is to ascertain the total cost of contract so as know the profit or loss incurred form the
contract.
Types of contracts
There are three types of contract which are mentioned below:
1. Fixed price contract:
The contract that is executed with the fixed price which is agreed by the contract and the
contractee is called the fixed price contract. Under this contract, no modification is made in
the agreed contract price irrespective of the changes in the price level of material and labour
in feature. In such type of contract, the contractor is benefited when the price of material and
labour decrease. In contrary to this, the contractee is benefited if the price of material and
labour increase.
2. Fixed price contract with escalation and de-escalation clauses:
Escalation clause is a of agreement that that aims to reduce the risks that is causes due to the
changes in the price of materials, labour and other services. Under this, the contract price is
adjusted in accordance, with the changes in the price of material, labour and other services.
The additional cost raised due to the increase in price is born by the contracted. Similarly, the
contract price is reduced if the cost decreases below a certain percentage. It is called de-
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Contract Costing
escalation or reverse clause. Escalation clause safe guides the interest of both the contractor
and contractor against unfavourable price change in future. Such clause may also apply where
material and labour utilization exceeds a particular limit. In this case, however, contractor
will have to prove that excessive utilization is not because of decrease in efficiency. The
contractor allows a rebate in the bills presented by him to the extent of the decrease in price.
3.
Cost plus contract:
The contract in which the contract price is determined by adding a certain percentage of
profit on cost is known as cost plus contract. The cost plus contract is adopted to overcome
with problem of fixing the contract price caused due to nature of contract, duration of
completion of contract, uncertainly of material, change in the price level, new technology
etc. this type of contract is mostly followed by the government for production of special
articles not usually manufactured, urgent repairs of vehicles, roads bridge etc. under this
types of contract, the contract starts the work and payment is made by the contracted
gradually on the basis of the cost incurred in the work completed plus certain percentage of
profit.
Preparation of a contract account

Under the contract costing, a separate account is opened for each contract so as to ascertain
the position of profit or loss. Such account is called a contract account. All the expenses
incurred in the contract like material, wages, direct expenses, plant and machinery etc. are
debited whereas material returned, and material at end, plant at end, work in progress or
contract price in case of completion of the contract etc. are credited in the contract account.
The difference between the debit and credit represents the loss or profit. The profit earned
under the completion of the contract is regarded as net profit or net loss in case of loss. The
profit earned from the contract which is in progress or not completed is called notional profit.
When loss takes place in such a situation, it is called net loss. It is because that a loss can
never be notional, it is always real. The specimen of a contract account is presented below:
a. When contract is totally competed:
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Contract Costing
Some contracts are small and can be completed within a year. In such a case, total contract
price is show on the credit side of the contract account as contracture's account. In this case,
if credit is heavy then balancing figure on debit side is called profit and if the debit side is
heavy, then the balance figure on credit side will be called a loss.
b. When contract is incomplete:

large contract take number of years to completion. In this situation, amount of work certified
and uncertified are found in the contract. Such amount of work certified and uncertified
should be shown on the credit side of the contract account under the head work-in progress
account.
1. Work certified:
The value of work completed and certified by contractee's engineers and architchets is called
work certified. As per provision of the contract, a fixed percentage of such work certified is
paid by contractee to contractor. Some percentage of work certified is retained money. The
work certified included the portion of notional profit therefore, if the cost of certified is lower
than the work certified, the different amount is called motioned ,profit, if the amount of cost
of work certified is higher than the work certified, the different will be loss.
2. Work uncertified:
On the date of preparation of contract account, there may be some competed but uncertified
work. The work of contract which is completed but not certified by the engineers is called
work uncertified. It is always recorded at cost price and not on contract prices so as to avoid
any profit element in it. The work uncertified never includes the portion of notional profit.
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Contract Costing
Treatment of materials in contract account
Treatment of plant in contract account

The machinery used for a contract is recorded in a contract account through two ways. They
are
The cost of machinery and equipment to be used for a longer period or purchase for
the contract is shown in the debit side of a contract account. The book value of the
machinery and equipment is shown in credit side. The book value is calculated by
deducting the depreciation from the cost of the machinery and equipment.
If the machinery and equipment is used for a short time in the contract, the amount of
depreciation charged is only debited in the contract account. In such a situation, the
purchase price in the debited side and the book value in the credit side are not shown.
This is generally done, if the plant and equipment are not used till the end of te
accounting period.
The treatments of plant and machinery in a contract account under different conditions
have been presented below:
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Contract Costing
Some other items used in costing account

Labour cost: all the workers engaged at the site of a particular contract,
irrespective of the nature of the work performed by items, are treated as direct
workers and the amount of wages paid to them as direct wages. Such wages are to be
charged to the particular contract directly. In case a worker (generally the supervisory
staff) is engaged at two or more contracts, his total wages may be apportionment to
different contract on the basis of time devoted to each contract or on some other
equipment basis' wages accrued or outstanding at the end of the accounting period
should appear on the debit side of the contract account.
Direct expenses: all expenses (other than material cost and direct wages)
Which have been incurred specifically for a particular contract are direct expenses and shall
be debited to contract a/c. example of direct expenses are: here charges of special plant (not
owned), carriage on materials purchase, travelling expenses relating to contract, etc.
Indirect expenses: there are certain expenses, which cannot be directly charged to
a particular contract e.g., salary of general manager, salary of architect engaged at a
number of contract simultaneously, salary of storekeeper, expenses of store and office
expenses. Since these expenses are incurred for the business as a whole, they are to be
apportioned to the different contract on some equitable basis.
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Contract Costing
Cost of sub-contracts: generally, the work of a specialized character e.g., road
construction in a building, installation of lifts, electrical fittings, is passed on to some
other contractor by the main contractor. In such cases, the work performed by the subcontractor forms a direct charged to be contractor concerned and the sub-contractor
price paid shall be debited to contract account.
Cost of extra work: sometimes, in case of a contract, some additional work o
variations of the work originally contracted for may be required by the contractee.
Since the additional work required will not be covered by the terms and condition of
original contract, it will be the subject of a separate charge., if the additional work
required by the contractee is quite substation, it should be treated as a separate
contract and dealt with in a separate account to be opened for it. But in case the
additional work is not substantial, the expenses incurred on extra work should be
debited to contract account as 'cost of extra work' and the extra amount which the
contractee has agreed to pay to the contractor should be added to the original contract
price.
Contract price: the contract price is the agreed price at which the contractor
undertakes to execute to contractor. The contractor account is credited with the
contractor price if it has been completed. In such a case, the amount of contract price
is debited to the 'contractee's personal account and credited to the 'contract account'.
No entry is passed in respect of the contract price in case of incomplete contracts.
Retention money: generally, the terms of the contract provide that the whole of
the amount shown by the archive's certificate shall not be paid to the contractor but a
specified percentage or portion money (say 10% or 20%) thereof shall be retained by
the contractee till the contract. Te money so retained is known as 'Retention money'.
The cash received from the contractee is credited to his personal account. The value of
work (certified and uncertified) is debited to work-in progress account. The work-inprogress account is shown as an asset in the balance sheet after deducting the amount
received from the contractee. In the beginning of the next year the work-in-progress
account is transferred to the debit side of the contract account. On competition of the
contract, the contractee's account is debited and contract account is credited by total
contract price.
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Contract Costing
Differences between job order costing and contract costing.

The different between job order costing and contract costing are mentioned below:
Size: The works perform under job order costing is comparatively small in size but
the work performed under contract costing is larger in six that the job order.
Place of work: in job order costing, the manufacturing of product is carried out inside
the factory premises but the production or construction work is carried out at site in
contract costing.
Time: job order costing takes comparatively lesser time to complete the work
whereas contract costing takes a longer time to complete a contract, even more than
an accounting period.
Payment of price: the price under job order is paid after the completion of job but
under a contract, it is gradually paid in different instalment before the completion of
the work.
Investment: preliminary investment is asserts is comparatively higher in contract
costing than job order costing.
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Contract Costing
OBJECTIVE OF THE STUDY

The proposed treatment of a construction contract by WINDSOR SHELTERS
balances the requirement to present financial statements under Accruals Basis, and the
conventional wisdom of the Prudence Concept.
Where a net inflow of economic benefits under a construction contract is probable,
costs and revenue are recognized to the extent of completion of the contract.
If however a loss is expected under the contract, the entire loss is immediately
recognized.
The following diagram summarizes the accounting treatment of construction contracts
under WINDSOR SHELTERS.
To understand the allocation and apportionment of different expenses.
To understand the apportionment of contract responsibility
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Contract Costing
STATEMENT OF THE STUDY
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Contract Costing
LIMITATION OF THE STUDY
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Contract Costing
SCOPE OF THE STUDY
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Contract Costing
CHAP 3:- COMPANY PROFILE
Windsor Shelters has been creating strong foundations for almost 2 decades, have experience,
conceiving, developing, constructing and managing varied projects. At Windsor Shelters, we
have consistently kept ourselves abreast of the times. Being proactive to changing scenarios
and perceptions has helped us create a loyal customer base in our residential and commercial
projects.
Windsor Shelters such strong teamwork, dedication and sheer hard work have ensured that
we have won a major industry award every year since the day we started. For us, this is just
the beginning.
The philosophy is to nurture the human and material resources to accomplish lasting
creations, in the least turnaround time, utilizing the best methods, materials and modern
equipment. Windsor shelters lives up to the maxim: Enduring Relationship with
vendors, suppliers, contractors, architects, interior designers, bankers, financial
institutions and private equity partners, and above all their Customers!
Vision Statement:
Windsor Shelters envisions a society where all families live a life of respect in homes they
can call and claim their own.
Mission Statement:
Our mission is to earn and maintain a position and name of respect in the industry and the
society as a company distinguished by its commitment to achieving its core purpose without
compromising on its core values.
Core Purpose:
Provide quality homes at reasonable price.
Windsor Shelters is guided and motivated by this core purpose or objective, which it
strives to achieve through allocation of all its resources and might.
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Contract Costing
Core Values:
Windsor Shelters is recognised and reputed for its core values. They may well be
considered as the character of the organization; the values that guide our behaviour
towards the individual and the society.
Respect for our employees, clients, suppliers, labourers and associates.
Provide complete satisfaction to our clients through uncompromising quality in

works, distinguished service and creating full value for money.
Our commitments are sacrosanct. We respect and keep them at all costs.
Work for the betterment of the society through judicious allocation and sharing of our
resources.
Organization Structure
Partners / Top Management profile
Milestones
Management
We have a highly qualified and experienced management team with extensive experience in
the real estate sector. One of our key strengths is our companys organizational structure
which promotes operational autonomy and efficiency across departments. We believe that our
emphasis on employee development and our internal human resources initiatives for the
development of our employees provides us with the skills to adapt to the future needs of our
business.
Quality
We at M/s. WINDSOR SHELTORS will strive to achieve complete customer Satisfaction by
executing quality work within time limit as well as by providing prompt services to the
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Contract Costing
customer. We will continuously review our Quality Management System and improve its
effectiveness.
Invest in Pune, India

The depreciation of the Indian rupee against the US dollar has made investments in Indias
real estate sector more affordable and extremely lucrative for international investors.
In fact at the Overseas Indian Facilitation Centre (OFIC) every other investment query is
regarding buying residential property in India. With the Union Cabinet approving the Real
Estate (Regulation and Development) Bill, the sector has become more transparent and
attracting large number of investors compared to last 3 years.
With several big infrastructure projects like the Metro Rail Project and proposed Pune
International Airport plan on the cards, real estate dealers highlight Pune as the most
preferred locations for property investment. This is leading to maximum demand for the
localities around IT hubs when it comes to both owned and rented flats. Even suburban areas
of the city are also witnessing a remarkable growth.
Corporate Social Responsibility

Mega health check up camp at Windsor County Site on 5th March 2016
Hemoglobin Checkup
ENT Checkup
BP, Diabetic Checkup & consultation, Blood Sugar
Cardiology Checkup ( Heart )
Orthopedic Checkup
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Contract Costing
Windsor Shelters enables an e-learning facility at Ramabai Ranade Aged School for
women!
It was really nice to see the empowerment bought to these ladies through education. Wish
them better learning and more joy in their life. Happy that we are part of their learning
adventure
Windsor Shelters opens a Nursery School for underprivileged on 1st July 2015
We feel very happy to share this moment of joy we had at Shri Narayana Vidyalaya at Dehu
road. We have opened an Nursery School on 1st of July for the underprivileged children who
cannot afford this financially. This is an English medium school. We are giving educational
books, toys, games & slide, stationery and everything necessary for them to encourage them
to have comfortable childhood.
Event on 10th November 2014 by Windsor Shelters at Gyangangotri Matimand

Mulanchi Niwas Shala
We are very happy to share the experience we had with the event at Gyangangotri Matimand
School which is located near Dhayari Gaon, Sinhgad Road. There are approximately 40
children who are staying there. Some of them are orphans; some have a father or a mother but
they cant afford to bring them up so this trust is looking after these kids.
Being a responsible Real Estate company in Pune we are conducting various activities for
needy people, so this time we decided visit this school and accordingly to their needs
Windsor Shelters and our employees distributed grains, snacks, toys, clothes & news papers
through which they can make paper bags.
The time we spent there is more important than what we have distributed. Kids need time,
love & attention. It was a wonderful experience. We all should visit these places, because if
you selflessly do something for them it brings a lot of peace and satisfaction. After seeing the
happiness, smile on the faces of these kids you feel like you are top of the world. It was a
kind of experience we will remember for a long time.
Parvati Climbing Event on 14th November 2014 by Yashwantrao Chavhan
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Contract Costing
We feel immense joy to share about our employees participating in Parvati Climbing
Competition. The event was arranged on 14th November, 2014. It was exhilarating and full of
fun. Even the people of the age 80, 90, and 102 years participated and completed 4 rounds of
parvati climbing.
Our General Manager Mr. Umesh Sutrave and Mr. R.D. Kabra who completed 10 rounds of
Parvati both are in the 50-60 Age group. We all should participate in such activities. To good
health and joys of little moments in life!
Types of Projects
Residential
All our apartments are designed to enter your home. This will help in rejuvenating every
nook and corner. The aura inside home will brighten you mood. Be it any season, your home
will be a place to enjoy all its natural glories. The ample daylight will save electricity.
Commercial
In CITY SQUARE, every nook and corner, foyer, lobby, office has got a unique personality
of its own. There are a variety of combinations from 700 to 5000 sq. ft. that suites your
requirement. View more details about the project here.
Farm Houses
Location of this project situated at the foothills of Tamhini hills in Raigad district
MANGOAN in north Konkan. Driving time is roughly 2 hours from Pune and 3 hours from
Mumbai. Untouched greenery, picturesque waterfalls and fruit orchards.
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Contract Costing
Awards and Recognition

Residential Project of the Year Award
It is our immense pleasure to announce that Windsor Shelters has won Residential Project of
the Year Award for Maple Woodz under the category of Residential Project of the year- Real
Estate by Lokmat National Awards for Excellence in Real Estate & Infrastructure.
Most Promising Construction Company of the Year Award
Windsor Shelters has won the Most Promising Construction Company of the Year Award by
Mr. Anil Shastri (Grand son of Lalbahadur Shastri) & Gujrat minister Mr. Ramanlal Vora.
Event was organized by worldwide Achievers Pvt. Ltd. at hotel The Leela, Mumbai on 7th
August 2015. For all the categories Nominations was received from all the zones like east,
west, south & north.
Worldwide Achievers Realty Leaders Awards property developers, builders, Real estate
sector, brokers, realtors, interior designers, architects, Real Estate Portal, Real Estate Allied
Companies, Infrastructure & Construction companies in India.
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Contract Costing
Construction Contracts
Examples of construction contracts include those negotiated for the construction of highways,
buildings, oil rigs, industrial units, pipelines, airlines and other similar assets. WINDSOR
SHELTERS deals with accounting of construction contracts from the perspective of the
contractors who undertake such projects on behalf of its clients. Self constructed assets for an
entity's own use are accounted for in accordance with IAS 16 and are not within the scope of
WINDSOR SHELTERS Construction Contracts.
Accounting Problem
Whereas in most industries, business process cycles are completed within a relatively short
period of time, it is normal practice in the construction industry for the duration of projects to
extend beyond one year. Before the introduction of WINDSOR SHELTERS Construction
Contracts, revenue was recognized by construction firms on Completed Contracts Basis
under which, profit on the construction contract was deferred until the completion of the
related project. As a result, there was a considerable time lag between the performance of
contract obligations and the recognition of related profit.
Completed Contract basis of accounting for construction contracts was considered by many
as being too prudent in that no revenue was recognized in respect partially completed
construction projects even when inflow of economic benefits could be reasonably expected.
Also, this method of accounting contradicted with the fundamental accruals concept of
accounting whereby income and expenses are recognized in the accounting period in which
they are incurred.
WINDSOR SHELTERS Construction Contracts - Accounting Treatment
WINDSOR SHELTERS Construction Contracts was introduced in order to counter the
deficiencies observed in accounting for construction contracts. It defines how a contractor
should recognize costs and revenue over the life of a construction contract.
WINDSOR SHELTERS proposes accounting for construction contracts on the basis of
expected outcome.
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Contract Costing
a) Outcome of a contract can be reliably measured:
Net Profit: If a profit is expected under the contract, revenue and costs (and hence
profit) are to be recognized in the income statement based on the Stage of Completion
of the contract (also known as Percentage of Completion Basis).
Net Loss: If a net loss is expected under the contract, the entire loss is recognized
immediately in the income statement. Revenue and contract costs are recognized in
the income statement on the basis of Stage of Completion of the contract.
b) Outcome of contract cannot be measured reliably:
Uncertain: If the outcome of construction contract is uncertain, no profit is

recognized. Costs are recognized in the period in which they are incurred. Revenue is
only recognized to the extent of costs incurred that are expected to be recovered.
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Contract Costing
RESEARCH METHODOLOGY
Introduction
The accounting methods available within in the construction industry are unique to this
industry. Understanding both the financial accounting and tax accounting requirements is
important, so the proper book-to-tax adjustments are made.
Financial Accounting
The primary sources for generally accepted accounting principles (GAAP) for accounting for
construction contracts are Accounting Research Bulletin (ARB) No. 45, Long-Term,
Construction-Type Contracts and Statement of Position (SOP) 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Under (GAAP)
there are two methods of recognizing revenues on construction contracts.
ARB 45, which was issued in 1955, describes the two generally accepted methods of
accounting for long-term construction type contracts; the percentage of completion method
and the completed contract method. Because of the complexities and uncertainties in
accounting for contracts, SOP 81-1 was issued in 1981 to provide additional guidance on the
application of generally accepted accounting principles (GAAP).
Under SOP 81-1, the two methods are not alternatives from which a contractor is free to
choose. SOP 81-1 establishes a strong preference for the percentage of completion method on
the presumption that contractors have the ability to make estimates that are sufficiently
dependable.
Therefore, the financial statements (whether audited, reviewed, or complied) that are
prepared for bonding, banking, or other reporting purposes are almost exclusively prepared
using the percentage of completion accounting method. However, in some circumstances,
where the estimation of the final outcome may be impractical except to assure no loss will be
incurred, the percentage of completion method will use a zero profit method (i.e. equal
amount of revenue and cost are recognized until the results can be more precisely estimated).
The completed contract method may be used for financial purposes in circumstances in which
the financial position would not vary materially from the percentage of completion method
(i.e. this would primarily occur with shot-term contracts). Additionally, the completed
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Contract Costing
contract method may be used in circumstances in which the contractor cannot make
reasonable estimates.
However, as discussed in the chapter on Small Contractors and Large Contractors, many
more accounting method choices are available to the contractor for tax purposes, depending
on the length of the contract, the type of construction involved, and the average annual gross
receipts of the taxpayer.
International Accounting Standards

Similar to SOP 81-1, which is a United States standard, International Accounting Standard
(IAS) 11 provides guidance for the accounting of the revenues and costs of construction
contracts. Under WINDSOR SHELTERS, the percentage of completion method should be
used when the outcome of a construction contract can be reasonably estimated. In
circumstances in which the outcome cannot be reasonably estimated, no profit should be
recognized. Contract revenue should only be recognized to the extent of contract costs are
incurred.
Balance Sheet Accounts

When accounting for contracts using the percentage of completion method (PCM), costs
determine the revenue and not the contracts earned or billed income, recognition.
Determining completion by costs (Total Costs Incurred divided by Total Estimated Costs) is a
computation not made through the day-to-day book recording procedures. For instance, there
is not a general ledger account for total estimated contract costs.
To account for the difference between percentage of completion method and billings, two
balance sheet accounts are created:
1. Costs and Estimated Earnings in Excess of Billings (Asset)
2. Billings in Excess of Costs and Estimated Earnings (Liability)
Example:
This situation illustrates the concept of journal entries for a construction contract using the
percentage of completion method. The contractor entered into a long-term construction
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Contract Costing
contract during the 2001 taxable year. The total estimated contract price is Rs 3,000,000, the
total estimated contract costs are Rs 2,000,000 and the contract is to be completed in 2002.
The total costs incurred on this contract during 2001 are Rs1, 000,000. The contractor billed
the customer Rs 1,200,000 during 2001.
During the tax year journal entries to record the transactions of this contract would be
recorded as shown below. (Note: the two entries below are a summary of the numerous
transactions that would have been recorded as the costs and billings were incurred.
Journal Entries Using Percentage of Completion Method
Journal Entries
Debit
Credit
Costs Incurred
1,000,000
Accounts Payable
1,000,000
Accounts Receivable
1,200,000
Costs and Estimated Earnings in Excess of Billings
1,200,000
At year-end, the contractor would determine the income to be included under the percentage
of completion method as follows:
Year-End Percentage of Completion Method
Total Costs Incurred
Time Estimated Contract Price
Equal PCM Income
(1,000,000)
(3,000,000)
(1,500,000)
Divided By
Total Estimated Costs
(2,000,000)
The necessary to bring the books and financial statements in accordance with the percentage
of completion method would be as follows:
Adjusting Journal Entry for Percentage of Completion Method
Journal Entries
Debit
Credit
Costs and Estimated Earnings in Excess of Billings
1,500,000
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Contract Costing
Income
1,500,000
At year-end the costs and estimated earnings in excess of billings account has a debit balance
of 300,000 and thus is represent as an asset on the balance sheet.
Basically, these two balance sheet accounts represent the difference between the accrual
method and the percentage-of-completion method for reporting income on a long-term
contract. Under either method, the costs related to the long-term contract are deducted as
incurred. Therefore, generally no difference exists between the two
methods for costs.
Accrual vs. Percentage of Completion Methods
Accrual vs. Percentage of Completion Methods
Income Billings per Accrual Method
Income per Percentage of Completion Method
Costs and Earnings in Excess of Billings
Amount
1,200,000
1,500,000
300,000
Balance Sheet Reporting

A basic reporting principle prevents assets and liabilities from being netted or offset against
each other. Thus both accounts (Costs and Earnings in Excess of Billings and Earnings and
Costs in Excess of billings) should be present on the balance sheet. The following procedures
are performed at year-end:
1. For each contract in progress at year-end, the total cost incurred to date plus the
estimated earnings (on percentage of completion method) is reduced by the total
amount of bills rendered to arrive at a net balance. The net balance, for each contract,
will be a debit if the total costs and estimated earnings exceed the billings and a credit
if the billings exceed the costs and estimated earnings.
2. All contracts that have a debit balance are added together with the total shown as an
asset on the balance sheet.
Windsor Shelters 29
Contract Costing
3. All contracts that have a credit balance are added together with the total shown as a
liability on the balance sheet.
See the Contracts In Process Schedule at the end of the chapter for an illustration of the
procedures above.
Book and Tax Differences
Schedule M-1 and M-3 adjustments result from both timing differences and permanent
differences between financial and tax accounting. The following items are intended to point
out some of the differences in financial and tax accounting that is unique to the construction
industry. These differences should be reconciled through Schedule M-1 and M-3 adjustments.
Revenue Recognition
As discussed above, Statement of Position 81-1 (SOP 81-1) virtually requires construction
companies to report income on the percentage of completion method. Generally, the bonding
company or a lending bank will require the taxpayer to submit audited (possibly reviewed)
financial statements, which will be reported on the percentage of completion method. For tax
accounting, the contractor may use a different method, such as completed contract method,
percentage of completion method, or capitalized cost method.
Contract Related Services
SOP 81-1 paragraph 12 provides a listing of contracts that are covered by this statement.
Included in that listing are engineers, architects, and construction management taxpayers.
Therefore, for financial purposes these contracts would be accounted for under the percentage
of completion method. However, for tax purposes, they generally cannot use a long-term
contract method (e.g., completed contract or percentage of completion). Revenue Ruling 7067, Revenue Ruling 80-18, Revenue Ruling 82-134, Revenue Ruling 84-32.
Determining Completion for Percentage of Completion Method
SOP 81-1 paragraph 44 provides a number of methods to measure the extent of progress
towards completion. They include the cost-to-cost method, variations of the cost-to-cost
method, efforts expended method, the units-of-delivery method, and the units-of-work-
Windsor Shelters 30
Contract Costing
performed method. For tax purposes, IRC 460 generally requires the cost-to-cost method.
However, the taxpayer may also elect the percentage of completion, 10% method in which
none of the contract revenue or costs is included in taxable income until the contract is 10%
complete. The contractor may also elect the simplified cost-to-cost method to determine
contract completion.
Loss Recognition
SOP 81-1 paragraph 85 requires the contractor to report the total loss on a contract as soon as
it is evident that a loss will occur. When the current estimates of total contract revenue and
contract cost indicate a loss, a provision for the entire loss on the contract should be made.
Provisions for losses should be made in the period in which they become evident under either
the percentage-of-completion method or the completed-contract method. However, for tax
purposes, the loss is not recognized until the job is completed, if on the completed contract
method, and as incurred, if on the percentage of completion method.
Sample Financial Statements using Percentage of

Completion Method
The exhibits below illustrate the financial statements when reporting construction contracts
on the percentage of completion method. They also include items to consider when reviewing
these statements.
Exhibit 6A - Balance Sheet
Exhibit 6B - Statement of Income and Retained Earnings
Exhibit 6C - Schedule 1 Earnings from Contracts
Exhibit 6D - Schedule 2 Contracts Completed
Exhibit 6E - Schedule 3 Contracts in Progress
Windsor Shelters 31
Contract Costing
Exhibit 6A Windsor Shelters Corporation

Assets:
Balance Sheet December 31, 2002

Current Assets:
Cash
Contract Receivables
Costs & Estimated Earnings
in Excess of Billings 1
Total Current Assets
9,000
335,000
28,711
372,711
372,711
Property & Equipment:

Furniture, Fixtures, &
Equipment
Accumulated Depreciation
Total Property and
Other Assets:
6,000
(1,500)
4,500
Equipment
Deposits
750
Total Other Assets
750
Total Assets
Liabilities
Liabilities:
and
Stockholder'
s Equity:
121,000
Accrued Liabilities
17,000
Deferred Income Taxes
36,000
and Estimated Earnings1

Total Liabilities
Stockholders
Equity:
Common Stock
5,666
179,666
179,666
1,000
Retained Earnings
197,295
Total Stockholders Equity
198,295
Total Liabilities and
750
377,961
Accounts Payable
Billings in Excess of Costs
4,500
198,295
377,961
Windsor Shelters 32
Contract Costing
Stockholders Equity
Notes
1
This account should reconcile to the Schedule 3 Contracts in Progress

Exhibit 6B WINDOR SHELTERS Corporation
Statement of Income and Retained Earnings December 31, 2002

Contract Revenue Earned 1
1,439,159
Less Costs of Revenue Earned 1
Gross Profit
(1,174,000)
265,159
Less General and Administrative Expenses

Income before Income Taxes
(199,000)
66,159
Less Income Taxes:

Current Income Taxes
(12,000)
Deferred Income Taxes
(4,000)
Net Income 2
50,159
Add Beginning Retained Earnings
147,136
Ending Retained Earnings
197,295
Exhibit 6C WINDOR SHELTERS Corporation Schedule 1

Earnings from Contracts Year Ended December 31, 2002
Windsor Shelters 33
Contract Costing
Description
Revenues
Earned
Cost of
Gross Profit
Contracts Completed during the
Revenues
(Loss)
502,000
361,000
141,000
Year1
Plus Contracts in Progress at
937,159
813,000
124,159
1,439,159
1,174,000
265,159
Year-End2
Earnings from Contracts
Notes
1
This amount is from Schedule 2 - Contracts Completed. It represents the amounts of
revenue earned and costs incurred during the 2002 tax year.
2
This amount is from Schedule 3 Contracts in Progress. It represents the amounts of
revenue earned and costs incurred during the 2002 tax year.
Exhibit 6D WINDOR SHELTERS Corporation Schedule 2
Proj
Contracts Completed Year Ended December 31, 2002

Constr Reven Cost Gros Reve Cost Gros Reve
Cost
Gros
ect
uction
ues
Of
nues
Of
nues
Of
Num Project
Earne
Reve
Profi
Earn
Reve
Profi
Earn
Reve
Profi
ber
d1
nues
ed 2
nues
ed 3
nues
(Los
(Los
(Loss
121
Johns
312,0
248,0
s) 1
64,00 193,0
122
Store
Rons
00
267,0
00
197,0
0
00
70,00 178,0
00
144,0
0
00
34,00 89,00
0
53,00
0
36,00
127
Club
Parking
00
403,0
00
312,0
0
00
$91,0 $250,
00
$199,
0
0
$51,0 $153,
0
$113,
0
$40,0
128
Lot
00
Hospital $35,0
00
$38,0
00
($3,0
000
0
00
0
000
$38,0
00
($3,0
000
0
172,0
s) 2
21,00 119,0
76,00
)3
43,00
000
$35,0
Windsor Shelters 34
Contract Costing
130
Office
00
$106,
00
$81,0
00)
$25,0 0
Buildin
000
00
00
$1,12
$876,
$247, $621,
$515,
3,000
000
000
000
00
$106,
00
$81,0
00)
$25,0
000
00
00
$106, $502,
$361,
$141,
000
000
000
g
Totals
000
000
Notes
1
Contract Totals for Revenues Earned, Cost of Revenues and Gross Profit (Loss) would be
used for the tax return if on the Completed Contract Method.

2
Before January 1, 2002
Year Ended December 31, 2002

Exhibit 6E WINDOR SHELTERS Corporation Schedule 3
#
Revenu
es
Contracts in Process Year Ended December 31, 2002

Estimated Revenues Cost of
Gross
Billed to
Gross
Earned 1
Profit
(Loss)
210,000
Revenues
Profit
Cost to
(Loss) 1
1,026,000
202,310
1,225,00
39,000
108,000
Complete 1
11
1,275,00
9
12
0
211,000
(10,000)
107,887
113,000
(5,113)
0
106,000
0
12
53,000
15,000
43,237
31,000
12,237
46,000
7,000
3
12
258,000
50,000
129,000
104,000
25,000
117,000
104,000
4
12
218,000
40,000
79,607
65,000
14,607
74,000
113,000
5
12
85,000
13,000
47,222
40,000
7,222
43,000
32,000
6
12
220,000
42,000
181,685
147,000
34,685
180,000
31,000
9
13
160,000
38,000
28,852
22,000
6,852
30,000
100,000
1
13
152,000
1,000
37,245
37,000
245
39,000
114,000
1,228,310
Date 1
Estimated
Windsor Shelters 35
Contract Costing
2,632,00
399,000
1,883,045
1,585,000
298,045
0
Notes
1
1,860,00
648,000
Amounts are from inception of the contract to December 31, 2002.

Exhibit 6E XYZ Corporation Schedule 3
Contracts in Process Year Ended December 31, 2002 (continued)

Reve Esti Reve Cost Gro Cost Billin Reve Cost Gro
Perce
nues
mate
nues
of
ss
and
gs in
nues
of
ss
ntage
Earn
Reve
Pro
Esti
Exces
Earn
Reve
Prof
Comp
Gross
ed 2
nues
fit
mate
s of
ed 4
nues
it
lete 4
(Lo
Costs
(Los
ss) 2
Earni
and
ngs
Esti
in
mate
Exces
s of
Earni
Billin
ngs 3
gs 3
3,310
Profit
(Loss
)
1,275
210,0
1,049
880,0
169,
,000
00
,000
00
000
9
1
211,0
(10,0
00
00)
0
1
53,00
15,00
3
1
258,0
50,00
00
4
1
218,0
40,00
00
5
1
85,00
13,00
1,887
12,00
2,763
0
0
5,607
4,222
s) 4
179,3
146,0
33,3
96.34
10
00
10
211,0
221,0
(10,
51.13
00
00
000)
43,23
31,00
12,2
81.58
37
129,0
104,0
25,0
50.00
00
00
00
79,60
65,00
14,6
36.52
07
47,22
40,00
7,22
55.56
Windsor Shelters 36
Contract Costing
2
6
1
220,0
42,00
00
9
1
160,0
38,00
00
1
1
152,0
1,000
00
1,685
1,148
1,755
181,6
147,0
34,6
82.58
85
00
85
28,85
22,00
6,85
18.03
37,24
37,00
245
24.50
937,1
813,0
124,
59
00
159
3
2,632
399,0
1,049
880,0
169,
28,71
,000
00
,000
00
000
5,666
Windsor Shelters 37
Contract Costing
REVIEW LITERATURE
Types and Features of Construction Contracts
Types of Construction Contracts
There are two generic types of construction contracts:
Fixed Price Contracts: Price of the contract is fixed in advance and is independent of
costs incurred in respect of the construction contract. Outcome of a fixed price
contract can be reliably measured if:
I.
Contract Revenue can be reliably measured. Revenue can usually be reliably

measured if it is specified in the contract.
II.
Contract costs incurred and to be incurred can be identified and measured

reliably.
III.
Stage of completion of contract can be reliably measured. It is necessary to

know the stage of completion of construction contract to estimate the extent of
future costs to be incurred to determine the expected outcome (profit and loss).
IV.
The inflow of economic benefits is probable.
Cost Plus Contracts: Price of the contract consists of the reimbursement of allowable
construction expenses incurred along with a predetermined profit margin over and
above the costs. Outcome of a cost plus contract can be reliably measured if:
I.
II.
Contract costs relating to the contract can be identified and measured reliably.
The inflow of economic benefits is probable.
Windsor Shelters 38
Contract Costing
Features of Construction Contracts
Construction contracts may also include the following features:
Cost Escalation Clauses: Contractors may be entitled to claim unanticipated increase

in construction costs above a certain level defined in the cost escalation clause. This is
usually included in fixed price contracts to protect against the risk of abnormal rise in
prices which may render the performance of contract unfeasible for the contractor.
Incentive Payments: Contractors may be entitled to receive additional payments

from clients upon fulfilment of a predefined criteria such as completion of project
within a certain time frame.
Penalties & Claims: Contractors may be liable to reimburse clients for not
performing according to the specifications of the contract. Reasonable estimate of
losses that may be suffered due to non performance of a specific term of the contract
may be defined in the penalty clause (e.g. amount payable for every day exceeding the
project deadline).
Conversely, contractor may be entitled to claims against losses suffered due to actions
of the customers such as faulty specifications and delays caused by customer.
Variations: Contract terms and specifications may be subsequently varied by the

mutual consent of the concerned parties. Variations may be necessary to accommodate
unforeseen factors such as a change in customer requirements.
Accounting Implications
When determining the expected outcome of a construction contract for application of
WINDSOR SHELTERS, all terms of the contract must be considered at the start of the
project and should be reviewed during the term of the contract. For example, if payment of
potential penalties under the contract become probable, it may be necessary to account for the
contract as a loss making contract if the expected outflow of economic benefits is likely to
exceed the potential benefits.
Windsor Shelters 39
Contract Costing
Introduction to Accounting For Construction Contracts
Accounting for construction contracts mainly includes treatment in respect of contract
revenue, contract costs, trade receivables, gross amount due to / from customers, advances
from customers and retention money.
Contract Revenue
Contract Revenue recognized in the income statements includes:
Amount of revenue initially agreed in the contract
I.
Incentive Payments considered likely to accrue to the contractor
II.
III.
Approved variations in contract revenue
IV.
Amount of claims that are considered likely to be accepted by the customer
Revenue in respect of construction contracts is recognized according to stage of completion

in respect of contracts whose outcome is reliably measured.
Contract Costs
All attributable costs of a contract must be recognized as construction costs. Other costs that
cannot be reasonably attributed to contract activity shall be charged as general and
administration expense in the accounting period they are incurred. Contract costs consist of
the following:
Direct or Specific Costs of the construction contract. Examples of direct costs

include:
I.
II.
Direct material consumed on a specific project

Direct labor allocated to a particular contract (e.g. project in charge, site
engineers, etc)
III.
Insurance cost specifically incurred on a construction contract
IV.
Depreciation of machinery and equipment used on a specific contract
Windsor Shelters 40
Contract Costing
Indirect Costs that may be allocated to individual contracts on a reasonable

basis. Examples of such costs include:
I.
Allocation of the cost of central technical assistance department based on for

example number of hours spent by technical staff on various contracts
II.
Insurance cost allocation in respect of machinery used on multiple sites
III.
Construction overheads
IV.
Allocation of salary of staff employed on multiple contracts (e.g. project

supervisors)
Indirect costs must be allocated on the basis of normal level of construction activity.
Similar to the requirements of IAS 2 Inventory, any abnormal wastage must not be
included in the contract costs. This is to prevent recognition of any such costs as
construction assets which are not likely to be recoverable in the future.
Any other costs specifically allowable under the contract.
Contract Costs are recognized according to the method of stage of completion used. Contract
costs incurred but not recognized in income statement are included in the Gross Amount Due
from Customers as explained below.
Trade Receivables
Trade Receivables are calculated by finding the difference between amount billed to the
customer for as progress billings and the amount of progress payments received from the
customer.
Trade Receivables are therefore calculated as follows:
Trade Receivables = Amount Billed to Customer as progress billings - Progress Payments
Received
Windsor Shelters 41
Contract Costing
Note that according to the Accruals Concept, any advance outstanding from customer in
respect of contractual work to be performed at a future date is not included as trade
receivables.
Gross Amount Due to / From Customers

Gross Amount Due from Customer represents the amount of revenue earned on a contract but
yet billed to the customer (if any billed amount is outstanding, it is included in trade
receivables as explained above). It also includes the amount of contract costs incurred to date
that have not yet been charged to the income statement. It therefore represents the contract
work in progress (inventory).
Gross Amount Due from Customer is calculated as follows:
Rs
XX
XX
XX
XX
XX
Contract Costs Incurred

Add: Profit Recognized
Less: Losses Recognized
Less: Progress Billings
Gross Amount Due From Customer
Conversely, Gross Amount Due to Customer represents the amount of revenue earned on a
contract in excess of the amount billed to the customer. It also includes the amount of
contract costs incurred in excess of the amount charged to the income statement.
Gross Amount due to Customer is calculated in the same way as gross amount due from
customer:
Contract Costs Incurred

Add: Profit Recognized
Less: Losses Recognized
Less: Progress Billings
Gross Amount Due to Customer
Rs
XX
XX
XX
XX
XX
Windsor Shelters 42
Contract Costing
Advances from Customers
Advance received from customers in respect of contract work that is yet to be performed
must be recognized as a liability until the work in respect of which the advance was given has
been performed.
Retention Money
Customers may retain an amount specified in the construction contract that may be returned
to the contractor after successful completion of the contract. Retention money may be
recognized as a receivable in the financial statements of the contractor until it is returned.
Stage of Completion (Percentage of Completion)
Stage of completion, also known as percentage of completion, is a measure of the extent of
work that has been completed in respect of a contract and is usually expressed in percentage
terms. WINDSOR SHELTERS Construction Contracts requires accounting for construction
contracts on the basis of stage of completion. Stage of completion may be measured in the
following ways:
Value Based Methods
Value of work completed in proportion to total contract price. The value of work may
be determined by conduction surveys of work performed.
Stage of Completion %
Value of Work Certified as complete
x 100
Total Expected Production or Usage
Physical units of work completed in comparison with total number of units to be

completed under the contract.
Physical Units of Work Completed
x 100
Total Number of Units as per Contract

When value based methods are used in accounting for profit making contracts and loss
making contracts, revenue is recognized on the basis of work certified as complete whereas
contract cost is measured as the balancing figure.
Windsor Shelters 43
Contract Costing
Cost Based Method
Costs incurred to date in comparison with total expected contract costs. When
estimating the stage of completion under this method, only those costs incurred must
be considered that reflect the present status of work performed. Therefore, any costs
that relate to future contract activity shall be ignored such as cost for the purchase of
materials that are yet to be used in the construction work.
Costs incurred to Date
x 100
Total Contract Costs
When cost based method are used in accounting for profit making contracts and loss
making contracts, cost is recognized on the basis of stage of completion whereas
contract revenue is measured as the balancing figure.
Where outcome in respect of a contract is not certain, stage of completion method is

not used to account for the construction contract.
Accounting for Profit Making Construction Contracts

Accounting treatment
Where outcome of the contract can be estimated reliably and the total revenues are likely to
exceed total costs, contract revenue and costs (and hence profit) are to be recognized in the
income statement on the basis of Stage of Completion of the contract (also known as
Percentage of Completion Method).
Example 1 - Construction Contract Accounting using Value Based Approach
WINDOR SHELTERS Builders LTD is a construction firm. It enters into a 2 year contract for
the construction of a building for one of its customers. WINDOR SHELTERS Builders LTD
estimates stage of completion on the basis of value of work completed. Following
information is available in respect of the contract at the end of first year:
Total Contract Price

Total Expected Costs
Amount
2,000,000
1,200,000
800,000
Windsor Shelters 44
Contract Costing
Value of work certified as complete
Amount billed to customer
Progress payments received from customer
1,000,000
900,000
700,000
Step 1 - Determine Expected Outcome of the Contract

As the total contract revenue exceeds total expected contract costs , the contract is expected
to be profitable. Therefore costs and revenue be accounted for using stage of completion
method.
Total Profit under the contract is expected to be 800,000.
Step 2 - Calculate the Stage of Completion
Stage of completion may be calculated as follows:
Stage of Completion % = [1,000,000 / 2,000,000] x 100 = 50 %
Step 3 - Determine the amounts to be recognized in Income Statement for Profit, Revenue
and Cost
When stage of completion is calculated using value based method, revenue to be recognized
is equal to the value of work certified as complete. Profit is calculated based on the
percentage of completion of the contract whereas cost recognized in the income statement is
the balancing amount arrived by calculating the difference between revenue and profit.
Revenue
Profit
Cost
(Value of work Certified)

(800,000 x 50%)
(Balancing Amount: [1,000,0000 - 400,000])
Amount
1,000,000
400,000
(600,000)
Step 4 - Calculate amounts to be recognized in the Balance Sheet for Gross Amounts due to/
from Customers and Trade Receivables
Windsor Shelters 45
Contract Costing
Trade Receivables are calculated finding the difference between amount billed to the
customer for progress payments and the amount of progress payments received from the
customer.
Trade Receivable of WINDOR SHELTERS Builders LTD should therefore be calculated as
follows:
Trade Receivable = 900,000 (Amount Billed) - 700,000 (Amount Received) = 200,000
Gross Amount due from Customers is calculated by deducting the amount billed to customer
(along with any losses recognized) from the sum of profit recognized and costs incurred to
date.
Gross Amount due from Customers of WINDOR SHELTERS Builder LTD must therefore be
calculated as follows:
Gross Amount due from Customer = 400,000 (Profit) + 800,000 (Cost Incurred) - 900,000
(Amount Billed) = $ 300,000
Step 5 - Prepare Extracts of Financial Statements in respect of Construction Contracts
WINDOR SHELTERS Builders LTD

Income Statement (Extracts for the Year 1)
Amount
1,000,000
(600,000)
400,000
Revenue
Cost
Profit
Balance Sheet (Extracts at the end of the Year 1)
Current Assets
Trade Receivables
Gross Amount due from Customers
Step 6 - Prepare Construction Contract Control Account
Amount
200,000
300,000
Windsor Shelters 46
Contract Costing
Although not a part of the double entry system, control accounts may be useful to confirm the
overall accuracy of accounting entries relating to construction contracts. WINDOR
SHELTERS Builders LTD's control account would appear as follows:
Debit
Revenue Recognized
Costs Incurred
Contract Control Account

Amount
Credit
1,000,000 Cost Recognized
800,000 Amount Received from customer
Trade Receivable
Amount due from customer
1,800,000
Amount
600,000
700,000
200,000
300,000
1,800,000
Example 2 - Construction Contract Accounting using Cost Based Approach

WINDOR SHELTERS Builders LTD is a construction firm. It enters into a 2 year contract for
the construction of a building for one of its customers. WINDOR SHELTERS Builders LTD
estimates stage of completion on percentage of cost basis. Following information is available
in respect of the contract at the end of first year:

Amount
2,000,000
1,200,000
800,000
900,000
700,000

As total contract revenue exceeds total expected contract costs the contract is expected to be
profitable. Therefore costs and revenue be accounted for using stage of completion method.
Total Profit under the contract is expected to be 800,000.
Step 2 - Calculate the Stage of Completion
Stage of completion should be calculated as follows:
Windsor Shelters 47
Contract Costing
Stage of Completion % = [ 800,000 / 1,200,000] x 100 = 66.67 %
and Cost
When stage of completion is calculated using cost based approach, Cost recognized in the
income statement is the contract cost incurred to date. Profit is calculated based on the
percentage of completion of the contract whereas Revenue recognized in the income
statement is the balancing amount arrived by adding cost and profit.
Cost
Profit
Revenue
(Cost incurred during the year)

(800,000 x 66.67%)
(Balancing Amount: [800,0000 - 533,333])
Amount
800,000
533,333
1,333,333
<="" b=""> of WINDOR SHELTERS Builders LTD should be calculated as follows :>
Gross Amount due from Customers of WINDOR SHELTERS Builder LTD must be
calculated as follows:
Gross Amount due from Customer = 533,333 (Profit) + 800,000 (Cost Incurred) - 900,000
(Amount Billed) = 433,333
Amount
1,333,333
(800,000)
533,333
Revenue
Cost
Profit
Current Assets
Windsor Shelters 48
Contract Costing
Trade Receivables
200,000
433,333

WINDOR SHELTERS Builders LTD's control account would appear as follows:
Debit
Revenue Recognized
Costs Incurred

Amount
Credit
800,000 Amount Received from customer
Trade Receivable
2,133,333
Amount
800,000
700,000
200,000
433,333
2,133,333
Loss Making Construction Contracts

If a loss is expected in respect of a construction contract, the entire loss is recognized
immediately in the income statement.
This is an application of the Prudence Concept under which anticipated losses are recognized
immediately in the income statement. This accounting treatment is also consistent with IAS
37 Provisions, Contingent Liabilities and Contingent Assets which requires unavoidable
losses in respect of onerous contracts to be expensed in the accounting period in which such
losses become probable.
If stage of completion is calculated using cost method, then cost incurred to date is
recognized in the income statement as contract cost. Entire net loss is recognized immediately
in the income statement and revenue is calculated as the difference between costs incurred
and net loss.
If stage of completion is calculated using value method, then revenue is recognized according
to the work certified as complete. Entire net loss is recognized immediately and contract cost
is calculated as the difference between revenue and net loss.
Windsor Shelters 49
Contract Costing
If the estimates relating to cost or revenue do not change in following periods, revenue
recognized in subsequent accounting periods will equal to contract costs giving no profit and
loss in later periods.
Example - Accounting for Loss Making Construction Contracts (Cost Method)
XYZ LTD is a construction firm. It enters into a 2 year fixed price contract for the
construction of a building for one of its customers. Prices of construction raw materials have
increased significantly since the start of the contract due to unforeseeable factors. XYZ LTD
estimates stage of completion on the basis of cost. Following information is available in
respect of the contract at the end of first year:

Amount
2,000,000
2,500,000
1,500,000
900,000
700,000

As total expected contract costs (Rs 2.5m) exceeds total expected revenue (Rs 2m), the
contract is expected to generate a loss of Rs 0.5m. Therefore, entire loss should be charged as
expense in the first year and the contract costs and revenue should be accounted for using
stage of completion method.
and Cost
Cost
Loss
Revenue
(Cost incurred during the year)

Entire Expected Loss (2,500,000-2,000,000)
(Balancing Amount: [1,500,000 - 500,000])
Amount
1,500,000
(500,00)
1,000,000
Windsor Shelters 50
Contract Costing
Trade Receivable of XYZ LTD should be calculated as follows:
Gross Amount due from Customers of XYZ LTD must be calculated as follows:
Gross Amount due from Customer = -500,000 (Loss) + 1,500,000 (Cost Incurred) 900,000 (Amount Billed) = $100,000
$
1,000,000
(1,500,000)
(500,000)
Revenue
Cost
Net Loss
Current Assets
Trade Receivables
$
200,000
100,000

XYZ LTD's control account would appear as follows:
Debit
Revenue Recognized
Costs Incurred

Amount
Credit
1,500,000 Amount Received from customer
Trade Receivable
2,500,000
Amount
1,500,000
700,000
200,000
100,000
2,500,000
In Year 2, if cost and revenue estimates do not change, following amounts will be recognized
in the income statement:
Income Statement (Year 2)
Amount
Windsor Shelters 51
Contract Costing
Cost
Revenue
Profit
(2,500,000-1,500,000 (already expensed))

(2,000,000-1,000,000)
(No profit or loss since entire loss already recognized)
1,000,000
1000,000
-
Accounting for Construction Contracts with Uncertain Outcome

When outcome of a contract cannot be measured reliably, no profit should be recognized in
the income statement in accordance with WINDSOR SHELTERS Construction Contracts.
Cost must be recognized in the accounting period in which they are incurred whereas revenue
recognized must be equal to the costs incurred that are considered likely to be recoverable
from the customer.
When the uncertainty concerning the outcome of the contract is removed, the contract
revenues and costs must be accounted for using stage of completion method.
Any contingencies and commitments arising from the contract must be disclosed in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Example - Accounting for Construction Contract with Uncertain Outcome
DEF LTD is a construction firm. It enters into a 2 year contract for the construction of a
building for one of its customers. Prices of construction raw materials have increased
significantly since the start of the contract due to unforeseeable factors. DEF LTD has
claimed compensation of extra costs incurred from the customer but the recovery of these
costs is uncertain. It cannot therefore be estimated reliably at the end of the first year of the
contract, whether the contract will be profitable or not.
Following information is available in respect of the contract at the end of first year:

Costs considered likely to be recoverable
Amount
2,000,000
1,200,000
1,000,000
900,000
700,000
Windsor Shelters 52
Contract Costing
As the outcome of the contract cannot be estimated with sufficient reliability, no profit should
be recognized in the accounting period.
and Cost
Revenue
Cost
Loss
(Costs incurred expected to be recoverable)

(Costs Incurred)
(Balancing Amount)
Amount
1,000,000
1,200,000
(200,000)
Trade Receivable of DEF LTD should be calculated as follows:
Gross Amount due from Customers of DEF LTD must be calculated as follows:
Gross Amount due from Customer = -200,000 (Loss) + 1,200,000 (Cost Incurred) 900,000 (Amount Billed) = 100,000
DEF LTD
Amount
1,000,000
(1,200,000)
(200,000)
Revenue
Cost
Profit
DEF LTD
Windsor Shelters 53
Contract Costing
Current Assets
Trade Receivables
Amount
200,000
100,000

Although not a part of the double entry system, control accounts may be useful to confirm the
overall accuracy of accounting entries relating to construction contracts. DEF LTD's control
account would appear as follows:
Debit
Revenue Recognized
Costs Incurred

Amount
Credit
1,200,000 Amount Received from customer
Trade Receivable
2,200,000
Amount
1,200,000
700,000
200,000
100,000
2,200,000

Contract Costing

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Windsor Shelters 1

INTRODUCTION OF THE STUDY

SUGGESTION & RECOMMENDATION

Cost plus contract:

Preparation of a contract account

a. When contract is totally competed:

b. When contract is incomplete:

Treatment of materials in contract account

Treatment of plant in contract account

Some other items used in costing account

Differences between job order costing and contract costing.

OBJECTIVE OF THE STUDY

STATEMENT OF THE STUDY

LIMITATION OF THE STUDY

SCOPE OF THE STUDY

Provide quality homes at reasonable price.

Respect for our employees, clients, suppliers, labourers and associates.

Provide complete satisfaction to our clients through uncompromising quality in

Partners / Top Management profile

Invest in Pune, India

Corporate Social Responsibility

BP, Diabetic Checkup & consultation, Blood Sugar

Cardiology Checkup ( Heart )

Event on 10th November 2014 by Windsor Shelters at Gyangangotri Matimand

Awards and Recognition

b) Outcome of contract cannot be measured reliably:

Uncertain: If the outcome of construction contract is uncertain, no profit is

International Accounting Standards

Balance Sheet Accounts

Costs and Estimated Earnings in Excess of Billings

Balance Sheet Reporting

Sample Financial Statements using Percentage of

Exhibit 6A - Balance Sheet

Exhibit 6B - Statement of Income and Retained Earnings

Exhibit 6C - Schedule 1 Earnings from Contracts

Exhibit 6D - Schedule 2 Contracts Completed

Exhibit 6E - Schedule 3 Contracts in Progress

Exhibit 6A Windsor Shelters Corporation

Balance Sheet December 31, 2002

Property & Equipment:

Total Other Assets

Deferred Income Taxes

and Estimated Earnings1

Total Stockholders Equity

Total Liabilities and

Billings in Excess of Costs

This account should reconcile to the Schedule 3 Contracts in Progress

Statement of Income and Retained Earnings December 31, 2002

Less General and Administrative Expenses

Less Income Taxes:

Deferred Income Taxes

Add Beginning Retained Earnings

Ending Retained Earnings

Exhibit 6C WINDOR SHELTERS Corporation Schedule 1

Contracts Completed during the

This amount is from Schedule 2 - Contracts Completed. It represents the amounts of

This amount is from Schedule 3 Contracts in Progress. It represents the amounts of

Contracts Completed Year Ended December 31, 2002

used for the tax return if on the Completed Contract Method.

Before January 1, 2002

Year Ended December 31, 2002

Contracts in Process Year Ended December 31, 2002

Amounts are from inception of the contract to December 31, 2002.

Contracts in Process Year Ended December 31, 2002 (continued)