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What are the features of contract accounting?

      

What are the features of contract accounting?

  

Answers

Wilfred
1. Direct expenses.
In addition to direct materials and direct labour, a high proportion of indirect expenses are incurred. This includes hire charges of plant & machinery, site office expenses, site power usage etc.
Most of the expenses are direct. Direct materials charged to a specific contract may be classified as
1. materials issued from the store and
2. Materials purchased for a contract from the local market.
These materials are charged to the respective contract.
In case of excessive materials, they are returned to the store and credited to the contract account. The materials on site at the end of the accounting period are valued at cost and carried forward to the next period. Direct wages both paid and accrued are debited to the contract account.

2. Overheads.
Expenses like telephone, electricity, repairs, water etc are allocated to the respective contract account. All other overheads incurred for the company as whole are apportioned on a suitable basis to all contracts. The proper share of these overheads is charged to a specific contract.

3. Contract plant
The amount of plant used in a contract work is a key feature.
This includes :cranes, trucks, mixers, lorries etc. if plant is on lease basis, then the leasing charges are directly charged to the contract, on the other hand, if plant is purchased then this plant is charged to that contract for which it was purchased.
At the end of the year or on completion of the contract, the contract account is credited with the value of plant at that time. Thus the depreciation of plant is charged to the respective contract. If the plant is moved frequently from one contract to another contract, then each contract is charged the depreciation of the plant at a specific rate.

4. Subcontracts:
If the contractor assigns some work to sub-contractors e.g. electrical or plumbing work, the amount paid to subcontractors is charged to the respective contract.

5. The contract price
This is the price agreed upon by the contractor and the contractee after the tendering process.

6. Architect’s certificate.
The architect inspects the work done periodically and certifies the amount of work completed. The contractor can claim the amount of work of work certified from the contractee. The architect is appointed by the contractee.

7. Retention
A specific percentage of work certified is withheld by the contractee or client. This amount withheld is known as retention money. The amount is paid to the contractor on the completion of the contract.
The main purpose of this retention money is to ensure that the contract has been completed according to the satisfaction of the client and all defects in the work have been rectified by the contractor. If the contractor does not remove such defects, then the retention money is not released by the contractee. The retention money is shown as debtors in the books of the contractor.

8. Profits on uncompleted contracts.
When a contract extends over a number of years, it may be necessary to take profit each year in order to avoid wide fluctuations in annual profits.
Wilfykil answered the question on April 17, 2019 at 08:17

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