Question

Question: In ABC firm of building, contractors began construction on 1st April, 2019. The contract is incomplete and the contractor is confused about how to transfer profit or loss in the P/L account. Being a student of cost accounting, you are required to state the rules regarding the transfer of profits to profit and loss account in case of incomplete contracts( 0%,20%,50%,75%,90 %) to the contractor.

Answer 1

In the construction contract , the revenues are matched with the costs in the period in which they are incurred.
However, construction contracts are long-term in nature and hence, the revenue and costs are carried over from one accounting period to another.

In case when the % of completion of contract is identifiable over the period of contract , the revenue should be recorded based on the percentage of the completion in Profit & Loss Account.

In case when % of completion is not identifiable then revenue should be equal to total cost incurred.

Let us assume the contract Revenue be 10 lacs & total contract cost 8 Lacs

and % of completion for the respective year is as follow

Year	% of completion	Total Revenue	Total Cost	Profit to be transaferred to P& L
2019-20	20%	200000	160000	40000
2020-21	50%	500000	400000	100000
2021-22	75%	750000	600000	150000
2022-23	90%	900000	720000	180000