Project Accounting

Dr. Sarbesh Mishra

NICMAR, HYD

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Contract
This refer to the work done by third party
who agreed to pay fixed sum of money for
the completion of a specific work.
Stages of Contract – A contract can be
divided into few stages, namely foundation
level, plinth level, roof level, roofing,
plastering of roofs and walls, laying of
floors, etc. are different stages. Thus cost
at each stage should be ascertained.
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Equipments
n Two possibilities are there, namely:
(i) Equipment may be bought – Value of the
equipment shall be debited to contract
account and on completion, it may be
credited with the value of the equipment.
(ii) Equipment is available / on Lease – The
depreciation / rent should be charged to
contract account.
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Indirect Expenditure
n When more than one contracts are in
hand, officers and contractors would be
paying attention to all the contracts.
n Indirect expenses would have to be
apportioned equitably in proportion to the
usage. If two contracts cost are 50,000 :
30,000, in materials, labour and plant, then
indirect expenses may be apportioned in
the above ratio of 5:3.
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Extra Work Done
n The client desires to get some additions
and alterations, which is not a part of the
original work, then the extra work must be
charged to the contract price as per
actuals inclusive of material, labour and
indirect expenses.
n Separate account should be maintained if
the extra work is considerable.
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Sub-contract
n A definite portion of the contract may be
entrusted to another contractor.
n In this case, the price paid should be
included in the cost of the main contract as
separate item.

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Work in Progress
n Certified Work in Progress – Contractor
receives certain percentage (say 80% or
90%) of the value of each definite stage of
work completed.
n After the issue of certificate from the
surveyor and architects, percentage
payment will be made and the rest
“retention money” will be paid once the
whole contract is executed.
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Uncertified Work-in-progress
n No certificate from the architect results in
no payment for the work by the contractee.

n WIP uncertified should be valued at cost-

materials used and wages spent.

n The amount is to be debited to WIP

account and credited to contract account.
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Profit on Incomplete Contract
n Entire profit cannot be transferred to Profit and
loss account as the project is not completed till
the year end because of possible rise in prices of
materials, wages, etc.

n If the contract has not advanced to a sufficiently

high stage, say ¼ of the total contract, the entire
profit should be left as reserve and nothing should
be transferred to P/L A/C.
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Example
Contract Price – 6,00,000/-
Cost of Completing the project – 5,20,000/-
Estimated Profit – 80,000/-
Value of work done – 2,50,000/-
Amount of profit to be transferred to P/L A/C is

80000 * 2,50,000 = 33,333/-

6,00,000
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