Question

elaborate a new business trade related to construction in order to diversify your business and five practices to show that your company is implementing the nature of accounting

Answer 1

Companies are to recognize revenue usually at the point of delivery or a sale. However, companies are allowed to recognize revenue over a period of time. Construction related businesses are the typical example where this method is followed.

Accounting methods: Long term construction contract business recognize revenue over time when it feels appropriate using the Percentage Completion method provided the accounting system can provide the measure the progress for the project completion and when it can reliably estimate the profitability.

Income recognition is based on the percentage of total income estimated in such a way that cost incurred till date bears to the whole of the costs estimated or it can be also based on indication of other measure for the project completion to the work actually performed.

Gross profit earned and the cost of construction are accumulated with an account named as Construction-in-Progress and Project Billing account is there to account for the accumulated construction billings.

Under the current asset section of the balance sheet Accounts due or Receivables is shown. Current liability section will show the progress billing that exceeds the cost and incomplete contract earnings.

Please refer to the following chart in order to have an understanding of the profit computation flow.

Step I	Calculate Gross profit
			Contract Price
	Less:		Total Estimated cost
			Gross Profit
Step II	Calculate % Completion
			Total Cost incurred till date
			divided by
			Estimated cost of contract
Step III	Calculate GP		Step I x Step II
			= Profit till date
Step IV	Calculate GP earned
	for the Current FY
			Profit till date at Current FY
	Less:		Profit till date at Opening FY
			Current Year GP

Loss on the contract is immediately recognized in the year in which it’s discovered.

Completed contract method estimated gross profit is not recognized as construction-in-progress. This method suggests not to recognize any profit till the contract gets accomplished.

Gross profit is recorded as the excess of total costs over the contracted price. Here again, the losses are recognized in the year of its discovery and to be provided for in full amount.