Chapter 9: Contract Costing

PRACTICAL QUESTION WILL APPEAR IN THE EXAM ON THIS TOPIC. 100% CHANCES.

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Introduction to Contract Costing

Definition
Contract costing is a specialized system of Job costing applies to long-term contracts as distinct from
short-term jobs. Contract costing is mainly applied in civil construction and engineering projects,
ship building, road and railway line contracts, construction of bridges etc.
CIMA defines Contract cost and Contract costing as follows— “Contract cost is the aggregated costs
relative to a single contract designated a cost unit”.
“Contract costing is that form of specific order costing which applies where work is undertaken to
customers’ special requirements and each order is of long-term duration”.

Features of Contract Costing

The following are the main features of contract costing—
1. Contracts are executed according to customers’ specifications.
2. Contracts differ from each other.
3. Each contract is a separate cost unit and its cost is to be calculated separately.
4. Contracts are executed away from contractor’s premises generally at customer’s site.
5. Contracts take long time to complete generally more than a year.
6. Contracts are generally of large size involving large costs.
7. Larger proportion of total costs is of the nature of direct costs. Most purchases of materials and
other costs are specific to contracts. This is true for labour cost also.
8. Sometimes sub contactors are employed for performing specialized job involved in a contract,
e.g. electrical fittings, welding, paint work, etc.
9. Separate accounts are prepared to determine the profitability of each contract.
10. Contractors receive payment for the execution of contracts in instalments based on the extent
of completion as certified by the expert.
11. Contracts involve problem of valuation of work-in-progress at the end of each accounting
period.
12. There is need to estimate the profit on incomplete contracts at the end of each accounting
period.
13. Imposition of penalties is normal in case of many types of contracts.
14. Control on materials, labour and other costs is generally more difficult in case of contracts
because work is generally done at a place far away from contractor’s premises and work on a
number of contracts may take place simultaneously at different places.
Note: The above are the features only and not the necessary conditions. Also, some of the
above features are applicable to other methods of costing also.
15. Contracts generally involves three parties—
a. Contractor, who executes the contract;
b. Contractee, who grants the contract to the contractor. He is contractor’s client;
c. Certifier, or evaluator, who periodically examines the progress of the contract both by
inspecting the documents as well as personally observing the work at site. He certifies the
value of work done up to a point of time. This expert or certifier or evaluator works on
behalf of the contractee. In case of contract for building of flats and houses, the certifier is
an architect of repute; in case of building of bridges etc., it could be a firm of civil engineers;
in case of construction of boiler houses, it could be affirmed of boiler house engineers; and
so on. This expert may also function as an arbitrator in case of a dispute or a separate
arbitrator may be appointed.

Types of Contracts
Contracts are generally of three types—

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 1. Fixed Price Contracts: Under these contracts a fixed price of the contract is agreed upon
between the contractor and the contractee. Agreed price is paid by the contractee to the
contractor. Deductions are made for defectives and penalties for delay and extra payment is
made for the additional work.
2. Contracts with Escalation Clause: In these cases, the contract price is fixed with a provision
that it will be increased with increase in price of materials, wage rates and other major costs,
and reduced with the decline in costs. This escalation is implemented according to mutually
pre-determined formula.
3. Cost Plus Contracts: This method is adopted where the probable cost of the contract cannot
be ascertained in advance with a reasonable accuracy. In case of these contracts no fixed price
is pre-determined for the contract. Contractee compensates the contractor for all allowable
costs actually incurred by him. Over and above these costs the contractor is paid a fixed
percentage of cost as profit or a lump sum fee of profit.
 There are two main parties in a contract: Contractor and the Contractee. Contractee is the person
who grants the contract to the contractor and contractor is the person who executes the contract.
 One more party is there called certifier/evaluator/engineer. Now what is the role of the certifier/
evaluator/engineer? Actually, contractee gives money to the contractor on the basis of the work
completed. Suppose, contract price is ₹10,00,000 and contractor says to the contractee that 40% work
is completed and give me ₹4,00,000 i.e. 40% of the contract price. Now, what if the work completed is
not 40% or if the work completed is 40%? In such a case after taking money the contractor may leave
the work in between. Now the certifier/evaluator/engineer (from the side of the contractee) comes in
the picture. Contractee sends the certifier/evaluator/engineer to the site and
certifier/evaluator/engineer gives a certificate for the completed work. On the basis of this certificate
only the contractee gives money to the contractor. Also, the contractee does not give the full money to
the contractor, because if he does so, then contractor may leave the work in between. So, the contractee
retains some money which is called the Retention Money. Now, if the certifier/evaluator/engineer
gives a certificate of 25% work completed then the value of the work certified will be ₹2,50,000
(₹10,00,000 × 25%). Now the contractor is eligible to get ₹2,50,000. But the contractee gives only
₹2,00,000 to the contractor, then ₹50,000 will be the retention money. This retention money is the 20%
of the work certified (₹50,000/2,50,000 × 100). Any work which is completed but not certified by the
certifier/evaluator/engineer is called the work not certified. Also, the expenses incurred after obtaining
the certificate for the completion of work will form part of the work not certified.
 In order to prepare the contract account, first of all learn/cram the format of the contract account.
It’s like a mini profit and loss account. It is prepared on the basis of two principles—debit what comes
in and credit what goes out, and debit all expenses and losses and credit all incomes and gains.
 Further, while preparing the contract account one must keep in mind the principle of normality also.
All the abnormal losses and abnormal incomes shall be excluded from the contract account. For
example, if there is any loss on sales of plant/machinery/material then obviously it’s already
included/debited in/to the contract account, so the amount of such loss shall be credited to the contract
account. Likewise, if there is any profit on sales of plant/machinery/material then obviously it’s already
included/credited in/to the contract account so the amount of such loss shall be debited to the contract
account.
 In case of expenses are being incurred then such expenses shall be debited to the contract account
on accrual basis. Outstanding expenses shall be added to the concerned expense and prepaid expenses
shall be subtracted.
 In case of material is being used for the contract then such amount shall be debited. In case of
outgoing material, the amount shall be credited using the principle of real accounts. At the time of
completion of the contract material is returned to the stores and it’s written on the credit side.
Sometimes the material consumed is calculated (or given) in the question, then such material consumed
shall be debited. In such a case all other transactions related to the material are not be recorded in the
contract account. Even profit/loss on sales of material or loss due to fire, rain, theft, etc. are not be
recorded. Material consumed can be calculated as follows—

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𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑑
= 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑓𝑟𝑜𝑚 𝑆𝑡𝑜𝑟𝑒𝑠
+ 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑 𝑓𝑟𝑜𝑚 𝑜𝑡ℎ𝑒𝑟 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠 − 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛𝑒𝑑 𝑡𝑜 𝑆𝑡𝑜𝑟𝑒𝑠
− 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑆𝑜𝑙𝑑 (𝐶𝑜𝑠𝑡) − 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑 𝑡𝑜 𝑂𝑡ℎ𝑒𝑟 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠
− 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑖𝑛 𝐻𝑎𝑛𝑑 𝑜𝑟 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑎𝑡 𝑆𝑖𝑡𝑒
 In case of plant and machinery is being used for the contract then cost of this shall be debited. In case
of outgoing plant and machinery the amount is to be credited using the principle of real accounts.
Record cost of the plant on the debit side and WDV (cost less depreciation) on the credit side. All the
outgoing plant and machineries shall be credited with the WDV i.e. cost less depreciation.
If the rate of depreciation is given per annum, then depreciation shall be calculated on the basis of time
but if per annum is not mentioned with the rate then depreciation shall be calculated for whole of the
year ignoring the time factor even though the plant was used for less than a year.
At the time of completion of the contract we return the plant to the stores and it’s WDV (cost less
depreciation) is recorded on the credit side.
 There is another method under which we do not record the cost on the debit side and WDV on the
credit side. In this method we only record the depreciation of the plant on the debit side. The
depreciation of all the plants (whether outgoing or balance of the plant at the end of the year) shall be
recorded on the debit side. In this method all other transactions related to the plant are not recorded in
the contract account. Even profit/loss on sales of plant or loss due to fire, rain, theft, etc. is not recorded
in the contract account.
 In case of the completion of the contract we write down the contract price on the credit side of the
contract account and the journal entry is—
Contractee Account Dr. -----
To Contract Account -----
Note: We do not record the Work Certified or Work Not Certified in the year of completion on
the credit side.
 In case of the completion of the contract, if the debit side is more than the credit side, then loss will
be there on the contract and the journal entry is—
Profit and Loss Account Dr. -----
To Contract Account -----
 In case of the completion of the contract, if the credit side is more than the debit side then profit will
be there on the contract and the journal entry is—
Contract Account Dr. -----
To Profit and Loss Account -----
 In case the contract is incomplete then—
1. First of all, write down the amount of the Work Certified and Work Not Certified under the
heading Work-in-Progress (see the format) on the credit side of the contract account (as given
in the format).
2. If debit side is more than the credit side, then loss will be there and such loss shall be credited to
the contract account. Journal entry is:
Profit and Loss Account Dr. -----
To Contract Account -----
3. If credit side is more than the debit side, then profit is there. But this total profit cannot be
assumed actual profit because the contract is incomplete. Such profit is called Notional Profit
and then bifurcated in to two parts. One part is transferred to the profit and loss account (How
much amount shall be transferred to the profit and loss account? There are certain rules for this
and discussed below the format of the contract account) and the remaining part is transferred
to the work in progress account (also called reserve). Why to take only a part of the Notional
Profit to the profit and loss account? It’s because of the Principle of the Conservatism or Principle
of Prudence. However, the true profit can be calculated only at the completion of the contract.
But if we calculate the profit only at the completion of the contract then for a company engaged
in the business of taking contracts, profits will be very high in the year in which too many
contracts are being completed and profits may be very low or sometime NIL in the year in which

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a few contracts are being completed or no contracts are being completed. Thus, the calculation
of the profit only at the time of completion of the contract puts the uneven burden on the profit
and loss account. By calculating notional profit and then bifurcation of it in two parts puts the
even burden on the profit and loss account and also helps the contractor to follow the principle
of conservatism/prudence.

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Day - 2

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Format of the Contract Account
Performa Contract Account
Amount Amount
Particulars ₹ Particulars ₹
To material issued from store –––– By material at site ––––
To material purchased –––– By material returned to store ––––
To material transferred from other contracts –––– By material transferred to other contracts ––––
By profit and loss account:
• Material/Plant stolen –––
To material consumed (if given, and in this • Material/Plant lost due to unforeseen reasons
case all other items related to material shall be e.g. fire, rain, etc. –––
ignored) –––– • Loss on sales of material/plant ––– ––––
To labour ––– By plant at site (Cost) –––
Add: Outstanding labour ––– –––– Less: Depreciation (–––) ––––
To plant issued (Cost) –––– By plant returned to store (Cost) –––
To plant purchased (Cost) –––– Less: Depreciation (–––) ––––
By plant transferred to other contracts (Cost)
To plant transferred from other contracts –––
(Cost) –––– Less: Depreciation (–––) ––––

To sub contract cost –––– By bank/cash a/c (Material/Plant sold) ––––

By work in progress (In case contract is
To cost of extra work done –––– incomplete):
Work certified –––
To site expenses –––– Work not certified ––– ––––

To direct expenses ––– By CONTRACTEE ACCOUNT (by the amount of

Add: Outstanding expenses ––– –––– contract price on the completion of contract) ––––

By profit and loss account (if there is loss on

To indirect expenses/overheads ––– contract either before completion or after
Add: Outstanding expenses ––– –––– completion) ––––
To profit and loss account:
(Profit on sales of material/plant) ––––
To Contract escalation (Decrease in CP) –––– By Contract escalation (Increase in CP) ––––

To profit and loss account (if contract is

completed and profit is there) ––––

To notional profit c/d (if work certified is

equal to or more than 25% of the contract
price) ––––
Total **** Total ****
To profit and loss account (part of notional
profit if the contract is not completed) * –––– By notional profit b/d ––––

To work-in-progress (transferred to reserve

only when the contract is not completed) ––––
Total **** Total ****

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When to calculate profit/notional profit

Contract

Complete (By
Contractee A/C): Incomplete (By WIP
Amount is the (WC + WNC))
Contract Price

Dr. side is more than

Cr. side is more than
Profit (To P&L A/C) the Cr. side-LOSS-By
the Dr. Side
P&L A/C

WC is equal to or more
WC is Less than 25% of WC is eqal to or more
Loss (By P&L A/C) than 25% of CP but
CP than 90% of CP
less than 90% of CP

Notional Profit shall Notional profit is

not be calculated. Profit (Notional profit calculated and
Balance shall be is calculated) Estimated profit is
transferred to the WIP calculated

One part is transferred One part is transferred

Profit and Loss Profit and Loss
Account Account

Balance is transferred Balance is transferred

to Work-in-Progress to Work-in-Progress
Account Account

Explanation to all the items of the contract account

1. Material
To material issued from store: Any material issued from the store shall be debited to the contract
account because it’s an expense. Apply the principle—Debit all expenses and losses. Further, you can
also apply the principle—Debit what comes in.
To material purchased: Any material purchased shall be debited to the contract account because it’s
an expense. Further, you can also apply the principle—Debit what comes in.
To material transferred from other contracts: Any material transferred from any other contract
shall be debited to the contract account because it’s an expense for this contract. Apply the principle—
Debit all expenses. Further, you can also apply the principle—Debit what comes in.
To material consumed (if given/calculated, then in this case all other items related to material
shall be ignored): Sometimes the material consumed is calculated in the question, then, such material
consumed shall be recorded on the debit side. In such a case all other transactions related to the
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material shall not be recorded in the contract account. Even profit/loss on sales of material or loss due
to fire, rain, theft, etc. shall not be recorded. Material consumed can be calculated as follows—
𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑑
= 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑑 + 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑓𝑟𝑜𝑚 𝑆𝑡𝑜𝑟𝑒𝑠
+ 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑 𝑓𝑟𝑜𝑚 𝑜𝑡ℎ𝑒𝑟 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠 − 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑅𝑒𝑡𝑢𝑟𝑛𝑒𝑑 𝑡𝑜 𝑆𝑡𝑜𝑟𝑒𝑠
− 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑆𝑜𝑙𝑑 (𝐶𝑜𝑠𝑡) − 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑇𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑 𝑡𝑜 𝑂𝑡ℎ𝑒𝑟 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡𝑠
− 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑖𝑛 𝐻𝑎𝑛𝑑 𝑜𝑟 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑎𝑡 𝑆𝑖𝑡𝑒
By material at site: This is the unused material so it shall be credited to the contract account. Apply
the principle—Credit what goes out. We write “By material at site” when the contract is not completed.
In case the contract is completed then we write “By material returned to stores”.
By material returned to store/supplier: This is the unused material so it is returned to the
store/supplier. It shall be credited to the contract account. Apply the principle—Credit what goes out.
Sometimes it’s specifically mentioned that the material is returned though the contract is not
completed, in such a case write “By material returned to store”.
By material transferred to other contracts: If any other contract(s) is/are running short of material
then the material can be transferred to that other contract(s). Because this material is not used for this
contract so we credit this to the contract account and apply the principle—Credit what goes out.
By profit and loss account (Material stolen, Material lost due to unforeseen reasons e.g. fire, rain,
etc., Loss on sales of material): The above losses are abnormal in nature. Further, while preparing the
contract account one must keep in mind the principle of normality also, so all the abnormal losses shall
be excluded from the contract account. Credit all these losses to the contract account and the journal
entry is—
Profit and Loss Account Dr. -----
To Contract Account -----
By material sold: Sometimes the material is sold because it’s of no use or not up to the specifications,
etc. Credit the amount of this because this will reduce the cost of the material or we can also say that
it’s outgoing in nature so credit it. Apply the principle—Credit what goes out.
Journal entry is—
Bank/Cash Account Dr. -----
To Contract Account -----

2. To Labour/Wages
It’s an expense so it’s shall be debited to the contract account by applying the principle—Debit all
expenses. Any outstanding amount shall be added and any prepaid amount shall be subtracted.

3. To Plant and Machinery

To plant issued: Cost of any plant issued from the store shall be debited to the contract account because
it’s an expense. Apply the principle—Debit what comes in.
To plant purchased: Cost of any plant purchased shall be debited to the contract account because it’s
an expense. Apply the principle—Debit what comes in.
To Plant transferred from other contracts: Any plant transferred from any other contract shall be
debited to the contract account because it’s an expense for this contract. Apply the principle —Debit
what comes in.
By profit and loss account (Plant stolen, Plant lost due to unforeseen reasons e.g. fire, rain, etc.,
Loss on sales of plant): The above losses are abnormal in nature. Further, while preparing the contract
account one must keep in mind the principle of normality also, so all the abnormal losses shall be
excluded from the contract account. Credit all these losses and the journal entry is—
Profit and Loss Account Dr. -----
To Contract Account -----
By plant at site: This is the remaining plant so it shall be credited to the contract account. Apply the
principle—Credit what goes out. We write “By plant at site” when the contract is not completed. But it
must be noted that only WDV i.e. (𝐶𝑜𝑠𝑡 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛) shall be recorded.

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By plant returned to store: This is the remaining plant and if not intended for further use then it can
be returned to the store. So, it shall be credited to the contract account. Apply the principle—Credit
what goes out. But it must be noted that only WDV i.e. (𝐶𝑜𝑠𝑡 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛) shall be recorded.
By plant transferred to other contracts: If any other contract(s) is/are running short of plant then
the plant can be transferred to that other contract(s). Because this plant is not used for this contract so
we credit this to the contract account and apply the principle—Credit what goes out. But it must be
noted that only WDV i.e. (Cost – Depreciation) shall be recorded.
By plant sold: Sometimes the plant is sold because it’s of no use or not up to the specifications, etc.
Credit the amount of this because this will reduce the cost of the plant or we can also say that it’s
outgoing in nature so credit it. Apply the principle—Credit what goes out.
Rate of depreciation is important: If the rate of depreciation is given per annum, then depreciation
shall be calculated on the basis of time but if per annum is not mentioned then depreciation shall be
calculated for whole of the year ignoring the time factor even though the plant was used for less than a
year.
In all the cases whenever we are crediting the plant, only WDV shall be credited i.e.
𝐶𝑜𝑠𝑡– 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛. But if any plant is being returned or transferred at the beginning of the year
then there is no need to write down the WDV i.e. Cost – Depreciation. Mean to say that only cost of the
plant shall be credited if it’s being returned at the beginning of the year. [Sometimes the time of
returning the plant is not given in the question, in such a case you may take an assumption regarding
the time.]
There is another method under which we do not record the cost on the debit side and WDV on
the credit side. In this method we only record the depreciation of the plant on the debit side. The
depreciation of all the plants (whether outgoing or balance of the plant at the end of the year) shall be
recorded on the debit side. In this method all other transactions related to the plant are not recorded in
the contract account. Even profit/loss on sales of plant or loss due to fire, rain, theft, etc. is not recorded.

4. Sub contract cost

The contractor is not able to carry out all task related to the contract on his own. In such a case he can
give sub contract to other persons. e.g. In case of building construction, the sub contract can be given
for the wiring, painting, wood work, finishing etc. Any amount incurred for the sub contract shall be
debited as it’s an expense. Apply the principle—Debit all expenses and losses.

5. Cost of extra work done

In case the contractor has carried out any extra work as per the specifications/instructions given by the
contractee then such expense shall be debited. Apply the principle—Debit all expenses and losses. Later
on, contractor can recover this amount from the contractee.

6. Site expenses
Any expense incurred on the site shall also be debited. There may be too many expenses under this
head. Apply the principle—Debit all expenses and losses.

7. Direct expenses
Any expense of direct nature shall be debited. Apply the principle—Debit all expenses and losses. Any
outstanding amount shall be added and any prepaid amount shall be credited.

8. Indirect expenses
Any expense of indirect nature shall be debited. Apply the principle—Debit all expenses and losses. Any
outstanding amount shall be added and any prepaid amount shall be credited.

9. To profit and loss account (Profit on sales of material/plant)

The above incomes are abnormal in nature. Further, while preparing the contract account one must
keep in mind the principle of normality also, so, all the abnormal incomes shall be excluded from the
contract account. Debit all these incomes and the journal entry is—
Contract Account Dr. -----

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 To Profit and Loss Account -----

10. To Contract escalation (Decrease in CP)

Sometimes the contract is subject to the escalation/de-escalation. According to this, if there is an
increase/decrease in the prices of material or labor then the contract price also increases/decreases
accordingly. If due to the applicability of the escalation/de-escalation clause there is decrease in the
contract price then such amount shall be debited to the contract account. The journal entry is—
Contract Account Dr. -----
To Contractee a/c -----

11. To profit and loss account (if contract is completed and profit is there)
In case of completion of the contract we write down the contract price on the credit side of the contract
account and the journal entry is—
Contractee Account Dr. -----
To Contract Account -----
Entry for the profit is—
Contract Account Dr. -----
To Profit and Loss Account -----
Entry for the loss is—
Profit and Loss Account Dr. -----
To Contract Account -----
Note: Work Certified or Work Not Certified is not credited in contract account in the year of completion.

12. To notional profit c/d (if work certified is equal to or more than 25% of the contract
price but less than 90% of the contract price) / Profit and loss account (part of notional
profit if the contract is not completed)* / Work in progress (transferred to reserve only
when the contract is not completed) / Work in progress (In case contract is incomplete):
Work certified and Work not certified
In case the contract is incomplete then—
1. First of all write down the amount of the Work Certified and Work Not Certified under the
heading Work-in-Progress (see the format) on the credit side of the contract account (as given
in the format).
2. If debit side is more than the credit side, then loss will be there and such loss shall be credited to
the contract account. Journal entry is—
Profit and Loss Account Dr. -----
To Contract Account -----
3. If credit side is more than the debit side, then profit is there but this total profit cannot be
assumed actual profit because the contract is incomplete. Such profit is called Notional Profit
and then bifurcated in two parts. One part is transferred to the profit and loss account (How
much amount shall be transferred to the profit and loss account? For this there are certain rules
and are discussed later immediately after the format of the contract account) and the remaining
is transferred to the work in progress account (also called reserve). Why to take only a part of
the Notional Profit to the profit and loss account? It’s because of the Principle of the
Conservatism or Principle of Prudence. However, the true profit can be calculated only at the
completion of the contract. And if we calculate the profit only at the completion of the contract
then for a company engaged in the business of taking contracts, profits will be very high in the
year in which too many contracts are being completed and profits may be very low or sometime
NIL in the year in which a few contracts are being completed or no contracts are being
completed. Thus, the calculation of the profit only at the time of completion of the contract puts
the uneven burden on the profit and loss account. By calculating notional profit and then
bifurcation of it in two parts puts the even burden on the profit and loss account and also helps
the contractor to follow the principle of conservatism/prudence.
Click to go to the topic.

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13. BY CONTRACTEE ACCOUNT (by the amount of contract price on the completion of
contract)
In case of the completion of the contract we record the contract price on the credit side of the contract
account and the journal entry is—
Contractee Account Dr. -----
To Contract Account -----
Note: We do not record the Work Certified or Work Not Certified in the year of completion on the credit
side.

14. By Profit and loss account (if there is loss on contract either before completion or
after completion)
In case of the completion of the contract, if the credit side is more than the debit side then profit will
be there on the contract and the journal entry would be:
Contract Account Dr. -----
To Profit and Loss Account -----
In case the contract is incomplete then:
1. First of all, write down the amount of the Work Certified and Work Not Certified under the
heading Work-in-Progress (see the format) on the credit side of the contract account (as given
in the format).
2. Now, if debit side is more than the credit side, then loss will be there and such loss shall be
credited to the contract account. Journal entry would be:
Profit and Loss Account Dr. -----
To Contract Account -----

15. Contract escalation (Increase in CP)

Sometimes the contract is subject to the escalation/de-escalation. If due to the applicability of the
escalation/de-escalation clause there is increase in the contract price then such amount shall be
credited to the contract account. The journal entry would be:
Contractee Account Dr. -----
To Contract -----

16. Profit and loss account (if contract is completed and loss is there)
1. If debit side is more than the credit side, then loss will be there and such loss shall be credited to
the contract account. Journal entry would be:
Profit and Loss Account Dr. -----
To Contract Account -----
2. If credit side is more than the debit side, then profit will be there and such profit shall be debited
to the contract account. Journal entry would be:
Contract Account Dr. -----
To Profit and Loss Account -----

17. Notional profit b/d

1. Notional profit is calculated only when the contract is incomplete. Further the value of the
work certified shall be less than ¼ th of the contract price. Also when value of work certified is
equal to or more than 90% of the contract price or estimated cost is given in the question or in
the question it is given that the contract is near completion, calculate the notional profit and then
estimated profit shall be calculated and the appropriate amount of the estimated profit shall be
transferred to the profit and loss account using any one of the formulae given below (Click here
to go to the link).
2. First of all write down the amount of the Work Certified and Work Not Certified under the
heading Work-in-Progress (see the format) on the credit side of the contract account (as given
in the format).
3. If credit side is more than the debit side, then profit is there but this total profit cannot be
assumed as actual profit because the contract is incomplete. Such profit (balancing figure) is
P a g e | 12
 called Notional Profit and it’s bifurcated in two parts. One part is transferred to the profit and
loss account (how much amount shall be transferred to the profit and loss account for this there
are certain rules and discuss later immediately after the format of the contract account) and the
remaining part is transferred to the work in progress account (also called reserve). Why to
transfer only a part of the Notional Profit to the profit and loss account? It’s because of the
Principle of the Conservatism or Principle of Prudence. However, the true profit can be
calculated only at the completion of the contract. And if we calculate the profit only at the
completion of the contract then for a company engaged in the business of taking contracts,
profits will be very high in the year in which too many contracts are being completed and profits
may be very low or sometime NIL in the year in which a few contracts are being completed or
no contracts are being completed. Thus, the calculation of the profit only at the time of
completion of the contract puts the uneven burden on the profit and loss account. By calculating
notional profit and then bifurcation of it in two parts puts the even burden on the profit and loss
account and also helps the contractor to follow the principle of conservatism/prudence.
Note: Always calculate the notional profit as a balancing figure and the brought down it and then
bifurcate it.

* How much of the notional profit should be transferred to Profit and Loss Account
when the contract is incomplete?
(i) When the value of work certified is less than ¼th of the contract price:
In this case notional profit shall not be calculated and of the balance shall be transferred to the Work in
Progress Account (provided credit side is more than the debit side).
Profit and Loss Account = NIL
Important Note: In case total of debit side is more than the credit side then the difference shall be
transferred to the Profit and Loss account.

(ii) When value of work certified is equal to or more than ¼th of the contract price but
less than ½ of the contract price:
1 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝑊𝑜𝑟𝑘 − 𝑖𝑛 − 𝑃𝑟𝑜𝑔𝑟𝑒𝑠𝑠 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡

(iii) When value of work certified is equal to or more than ½ of the contract price but less
than 90% of the contract price:
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝑊𝑜𝑟𝑘 − 𝑖𝑛 − 𝑃𝑟𝑜𝑔𝑟𝑒𝑠𝑠 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡

(iv) When value of work certified is equal to or more than 90% of the contract price or
estimated cost is given in the question or in the question it is given that the contract is
near completion:
In this case first of all estimated profit shall be calculated and then the appropriate amount of the
estimated profit shall be transferred to the profit and loss account using any one of the formulae given
below.
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 = 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 − 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐶𝑜𝑠𝑡 = 𝐶𝑜𝑠𝑡 𝑎𝑙𝑟𝑒𝑎𝑑𝑦 𝑖𝑛𝑐𝑢𝑟𝑟𝑒𝑑 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑

𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝑃 & 𝐿 𝑎/𝑐 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 × × (𝐵𝑒𝑠𝑡 𝐹𝑜𝑟𝑚𝑢𝑙𝑎) , 𝑜𝑟
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

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 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
𝑃 & 𝐿 𝑎/𝑐 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 × , 𝑜𝑟
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑊𝑜𝑟𝑘 𝑡𝑜 𝐷𝑎𝑡𝑒

𝑃 & 𝐿 𝑎/𝑐 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 × , 𝑜𝑟
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑊𝑜𝑟𝑘 𝑡𝑜 𝐷𝑎𝑡𝑒 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝑃 & 𝐿 𝑎/𝑐 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 × ×
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑

(v) Amount to be transferred to the work in progress account (reserve)

𝐴𝑚𝑜𝑢𝑛𝑡 𝑡𝑜 𝑏𝑒 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟𝑟𝑒𝑑 𝑡𝑜 𝑡ℎ𝑒 𝑤𝑜𝑟𝑘 − 𝑖𝑛 − 𝑝𝑟𝑜𝑔𝑟𝑒𝑠𝑠 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑃 & 𝐿 𝑎/𝑐

Treatment of Work in Progress in Balance Sheet

Sometimes in the question it is asked to prepare the balance sheet and to show the relevant items in it.
Then the balance sheet shall be prepared as follows:
Balance Sheet as on DD/MM/YEAR
Liabilities Amount Assets Amount
Profit on sales of material/plant ––– Plant and machinery (Cost – Depreciation i.e. WDV) –––
Profit on the contract (before or ––– Material in hand –––
after completion) Work in Progress:
Work Certified –––
Work un–certified –––
Less: Reserve for unrealized profit –––
Less: Cash received from Contractee (–––) –––
Loss on sales of material/plant –––
Loss on the contract (before or after completion) –––
If you are showing relevant items in the balance sheet then total will not tally.

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Day – 3

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Illustration 1: Treatment of material
Mohan took a contract for constructing a Dispensary. Material purchased from the market ₹80,000; material issued from
store ₹15,000; material transferred to this contract from another contract ₹28,000; material costing ₹7,000 was stolen from
site; material costing ₹13,000 was returned to store; material lost by fire on site ₹1,200; material costing ₹1,000 was sold
for ₹800; material costing ₹4,000 transferred to another contract and material at site at the end of the year was ₹8,000.

Solution
Contract Account (Dispensary)
Particulars Amount (₹) Particulars Amount (₹)
To material purchased 80,000 By material at site 8,000
To material issued from store 15,000 By material returned to store 13,000
To material received from another By material transferred to another
contract 28,000 contract 4,000
By cash a/c (material sold) 800
By P & L a/c (loss on sales of material) 200
By P & L a/c (Material stolen) 7,000
By P & L a/c (Material lost by fire) 1,200

Illustration 2: Treatment of material

Material purchased ₹1,00,000; Opening material ₹20,000; Material at site ₹30,000; Material costing ₹10,000 was sold for
₹12,000; Material costing ₹5,000 was sold for ₹3,000; Material costing ₹4,000 lost by fire. Show the treatment of the material
using both the methods.

Solution
Method 1
Contract Account
Particulars Amount (₹) Particulars Amount (₹)
To opening material 20,000 By material at site 30,000
To material purchased 1,00,000 By cash a/c (material sold) 12,000
To P & L a/c (profit on sales of material) 2,000 By cash a/c (material sold) 3,000
By P & L a/c (loss on sales of material) 2,000
By P & L a/c (material lost by fire) 4,000
Note: If you calculate the balance of the above contract account then you will get ₹71,000 as balancing figure which is the
amount of the material consumed.
Method 2
Contract Account
Particulars Amount (₹) Particulars Amount (₹)
To material consumed 71,000
Material Consumed = Opening Material + Material Purchased – Material at Site – Material Sold (Cost) – Material Sold (Cost)
– Material Lost by Fire (Cost)
= 20,000 + 1,00,000 – 30,000 – 10,000 – 5,000 – 4,000 = 71,000
From the above example (example 2) it’s clear that whatever method (Method 1 or Method 2) is used for the
treatment/adjustment of the material the impact/effect on the contract account is same.

Illustration 3: Treatment of plant & machinery

Hira Lal a building contractor started a work from 1st January 2010. On 1 st March 2010 a plant costing ₹60,000 was
purchased for the contract. A part of the plant costing ₹10,000 was unsuitable and returned to store on 31st May 2010. Plant
costing ₹6,000 was stolen from the site at the beginning. Plant costing ₹20,000 was sold for ₹13,000 on 31st December 2010.
Accounts are closed on 31 st December every year. Charge depreciation (i) at 10% and (ii) at 10% per annum and show the
treatment in the contract account.

Solution
Case 1: When depreciation is charged at 10%
Contract Account
Particulars Amount (₹) Particulars Amount (₹)
To plant purchased 60,000 By plant returned to store:
Cost ₹10,000 9,000
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 Less: Dep. @ 10% (₹1,000) (Note
– 1)
By P & L a/c (Plant stolen) 6,000
By cash a/c (plant sold) 13,000
By P & L a/c (Loss on sales of plant)
(Note -2) 5,000
60,000-10,000-6,000-20,000=24,000 Plant at site:
1,000+2,000+2,400=₹5,400 Cost ₹24,000
Less: Dep. @ 10% (₹2,400)
(Note- 3) 21,600
Note – 1: Calculation on depreciation on plant returned to store (on 31st May 2010)
₹10,000  10 / 100 = ₹1,000 (Time has been ignored as, per annum is not given with the rate)
Note – 2: Calculation of loss on sales of plant (on 31 st December 2010)
₹
Cost of the plant 20,000
Less: Depreciation @ 10% (time has been ignored as, per annum is not given with the rate) (2,000)
Written Down Value 18,000
Less: Sales of the Plant (13,000)
Loss on Sales 5,000
Note – 3: Calculation of plant at site (on 31st December 2010)
₹
Cost of the plant 60,000
Less: Cost of the plant returned (10,000)
Less: Cost of the plant stolen (6,000)
Less: Cost of the plant sold (20,000)
Cost of the plant at site 24,000
Less: Depreciation @ 10% (time ignored as per annum is not given with the rate) (2,400)
Value of the plant at site 21,600

The above example (Example 3 and Case – 1) can be also be solved by taking the amount of the depreciation only. In such
a case the amount of depreciation shall be debited to the contract account and all other transactions shall be ignored. Let us
calculate the amount of depreciation:
₹
Depreciation on plant returned (10,000  10%) 1,000
Depreciation on plant stolen (Not applicable as the plant was stolen in the beginning) 0
Depreciation on plant sold (₹20,000  10%) 2,000
Depreciation on plant at site (₹24,000  10%) 2,400
Total depreciation 5,400
Note: If you calculate the balance of the above contract account then you will get ₹5,400 as balancing figure which is the
amount of the material consumed.
Case 2: When depreciation is charged at 10% per annum
Contract Account
Particulars Amount Particulars Amount
(₹) (₹)
To plant 60,000 By plant returned to store:
Cost ₹10,000
Less: Dep. @ 10% (₹250) (Note – 1) 9,750
By P & L a/c (Plant stolen) 6,000
By cash a/c (plant sold) 13,000
By P & L a/c (Loss on sales of plant) (Note – 2) 5,333
Plant at site:
Cost ₹24,000
Less: Dep. @ 10% (₹2,000) (Note – 3) 22,000
Note – 1: Calculation on depreciation on plant returned to store on 31 May 2010
st

₹10,000  10 / 100  3 Months / 12 Months = ₹250

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Note – 2: Calculation of loss on sales of plant (on 31 st December 2010)
₹
Cost of the plant 20,000
Less: Depreciation @ 10% for 10 months (1,667)
Written Down Value 18,333
Less: Sales of the Plant (13,000)
Loss on Sales 5,333
Note – 3: Calculation of plant at site
₹
Cost of the plant 60,000
Less: Cost of the plant returned (10,000)
Less: Cost of the plant stolen (6,000)
Less: Cost of the plant sold (20,000)
Cost of the plant at site 24,000
Less: Depreciation @ 10% for 10 months (2,000)
Value of the plant at site 22,000

The above example (Example 3 and Case – 2) can be also be solved by taking the amount of the depreciation only. In such
a case the amount of depreciation shall be debited to the contract account and all other transactions shall be ignored. Let u s
calculate the amount of depreciation:
₹
Depreciation on plant returned (10,000  10% per annum  3 Months/ 12 Months) 250
Depreciation on plant stolen (Not applicable as the plant was stolen and it is abnormal in nature) 0
Depreciation on plant sold (₹20,000  10% per annum  10 Months / 12 Months) 1,667
Depreciation on plant at site (₹24,000  10% per annum  10 Months / 12 Months) 2,000
Total depreciation 3,917
Note: If you calculate the balance of the above contract account then you will get ₹3,917 as balancing figure which is the
amount of the material consumed.

Illustration 4
The price of a contract is ₹20,00,000. On 31st March 2017, the value of work certified was ₹15,00,000 and the total cost
incurred was ₹11,00,000. The value of work uncertified was ₹50,000. The cash received was ₹10,00,000. You are required
to determine the amount of the profit to be taken to the P & L a/c and to the work in progress account (reserve).

Solution
First of all, prepare the contract account and calculate the notional profit. Then bifurcate the notional profit in two parts.
Use the formula, which is used to calculate the amount to be transferred to the profit and loss account. (Click here to see the
rules for the calculation of amount to be transferred to the P & L a/c in case of incomplete contracts). It is to be noted that,
always calculate the notional profit first as a balancing figure and then brought it down and then bifurcate the notional profit
in two parts. This is the easiest approach.
Contract Account
For the year ending 31 st March 2017
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹15,00,000
To cost incurred 11,00,000 Work not certified ₹50,000 15,50,000
To notional profit c/d 4,50,000
Total 15,50,000 Total 15,50,000
To P & L account (Note – 1) 2,00,000 By notional profit b/d 4,50,000
To work in progress a/c (Bal. figure) 2,50,000
(Note – 2)
Total 4,50,000 Total 4,50,000
Note – 1: Percentage of the work certified to the contract price is 75% i.e. ₹15,00,000 / ₹20,00,000  100. Because the value
of work certified is equal to or more than ½ of the contract price and less than 90% of the contract price, so, profit (which is
to be transferred to the P & L a/c) shall be calculated using the following formula:
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
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 2 10,00,000
= 4,50,000 × × = ₹2,00,000
3 15,00,000
Note – 2: Amount to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹4,50,000 – ₹2,00,000 = ₹2,50,000

Illustration 5: Loss before completion

The price of a contract is ₹20,00,000. On 31st March 2017, the value of work certified was ₹15,00,000 and the total cost
incurred was ₹16,00,000. The value of work uncertified was ₹50,000. The cash received was ₹10,00,000. You are required
to determine the amount of the profit to be taken to the P & L a/c and to the work in progress account (reserve).

Solution
Contract Account
For the year ending 31 st March 2017
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹15,00,000
To cost incurred 16,00,000 Work not certified ₹50,000 15,50,000
By profit and loss account 50,000
Total 16,00,000 Total 16,00,000
Note: In this question the debit side of the contract is more than credit side, so, there is loss and has been transferred to the
costing profit and loss account.

Illustration 6: Work certified is less than ¼ of the contract price

The price of a contract is ₹20,00,000. On 31 st March 2017, the value of work certified was ₹4,00,000 and the total cost
incurred was ₹3,50,000. The value of work uncertified was ₹30,000. The cash received was ₹3,60,000. You are required to
determine the amount of the profit to be taken to the P & L a/c and to the work in progress account (reserve).

Solution
Contract Account
For the year ending 31 st March 2017
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹4,00,000
To cost incurred 3,50,000 Work not certified ₹30,000 4,30,000
To work-in-progress account 80,000
Total 4,30,000 Total 4,30,000
Note: Percentage of the work certified to the contract price is 20% i.e. ₹4,00,000 / ₹20,00,000  100. Because the value of
work certified is less than ¼ of the contract price, so, no profit (which is to be transferred to the P & L a/c) shall be transferred
to the profit and loss account. The balance shall be transferred to the work-in-progress account.

Illustration 7
The contract price is ₹20,00,000. On 31st March 2018, 90% of the work had been completed and certified by the architects.
The costs incurred up to 31 st March, 2018 on this project amounted to ₹16,00,000. It was estimated that another 80,000
would have to be incurred further to complete the project. The contractee paid 75% of the value of the work certified. Work
not certified is ₹1,00,000. Find out the profit to be taken to profit and loss account.

Solution
Contract Account
For the year ending 31 st March 2018
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹18,00,000
To cost incurred 16,00,000 Work not certified ₹1,00,000 19,00,000
To notional profit c/d 3,00,000
Total 19,00,000 Total 19,00,000
To P & L account (Note – 2) 2,16,000 By notional profit b/d 3,00,000

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 To work in progress a/c (Bal. figure) 84,000
(Note – 3)
Total 3,00,000 Total 3,00,000
In this question it’s clearly stated that the 90% of the work has been completed and certified, so the contract is near
completion. First of all, estimate the profit as follows (Click here to see the rules for the calculation of estimated profit and
amount to be transferred to the P & L a/c in case of near completion contracts):
Note – 1: Estimated Profit = Contract Price – Estimated Cost
= ₹20,00,000 – (₹16,00,000 already incurred + ₹80,000 to be incurred)
= ₹3,20,000
Note – 2: Profit to be taken to the P & L a/c (In case the contract is near completion):
𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 13,50,000
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 × = 3,20,000 × = ₹2,16,000
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 20,00,000
Note – 3: Amount to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹3,00,000 – ₹2,16,000 = ₹84,000

Illustration 8
Following is the information related to the contract account number 101—
Contract price ₹6,00,000
Wages ₹1,64,000
General expenses ₹8,600
Raw materials ₹1,20,000
Plant issued/purchased ₹20,000
As on date, cash received was ₹2,40,000, being 80% of the work certified. The value of materials remaining at site was
₹10,000. Depreciate plant by 10%. Prepare the contract account. (Examination Question)

Solution
Contract Account
For the year ending 31 st March 20xx
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹3,00,000
(Note – 1)
To raw material 1,20,000 Work not certified ₹0 3,00,000
By plant at site:
Cost ₹20,000
Less: Depreciation (₹2,000) (Note
To wages 1,64,000 – 2) 18,000
To general expenses 8,600 By material at site 10,000
To plant issued/purchased (Note – 6) 20,000
To notional profit c/d (Note – 3) 15,400
Total 3,28,000 Total 3,28,000
To P & L a/c (Note – 4) 8,213 By notional profit b/d 15,400
To work in progress a/c (Bal. figure) 7,187
(Note – 5)
Total 15,400 Total 15,400
Note – 1: Cash received is given ₹2,40,000 which is 80% of the work certified. So, work certified can be calculated as
follows—
2,40,000 100
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 = 𝑜𝑟 2,40,000 × = ₹3,00,000
80% 80
Note – 2: Depreciation has been calculated at 10%. Time factor has been ignored as the per annum is not given.
10 10
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑙𝑎𝑛𝑡 × = 20,000 × = ₹2,000
100 100
Note – 3: In this question the percentage of the work certified is 50% i.e. Work Certified/Contract Price  100 i.e.
₹3,00,000/₹6,00,000100. Further the credit side of the contract is more than the debit side, so notional profit is there. Then
notional profit has been brought down, so that, it can be bifurcated in two parts.

P a g e | 20
Note – 4: Percentage of the work certified to the contract price is 50% i.e. ₹3,00,000 / ₹6,00,000  100. Because the value of
work certified is equal to or more than ½ of the contract price but less than 90% of the contract price, so, profit (which is to
be transferred to the P & L a/c) shall be calculated using the following formula:
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 2 % 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃 & 𝐿 a/c = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × × 𝑜𝑟 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 3 100
2 2,40,000 2 80
= 15,400 × × or 15,400 × × ≅ ₹8,213
3 3,00,000 3 100
Note – 5: Amount to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹15,400 – ₹8,213 = ₹7,187
Note – 6: Alternatively, the depreciation of ₹2,000 can be debited and in such a case cost of the plant and the WDV of the
plant shall not be recorded in the contract account.

Illustration 9
How much profit will be credited to profit and loss account in the following case:
Contract price ₹20,00,000
Cost incurred ₹11,20,000
Cash received (90% of work certified) ₹10,80,000
Work not certified ₹1,20,000 (Examination question)

Solution
First of all, prepare the contract account and calculate the notional profit. Then using the formula used to calculate the
amount to be transferred to the profit and loss account. (Click here to see the rules for the calculation of amount to be
transferred to the P & L a/c in case of incomplete contracts). It is to be noted that always calculate the notional profit first of
all as a balancing figure and then brought it down and then bifurcate the notional profit in to parts. This is the easiest
approach.
Contract Account
For the year ending 31 st March 2017
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹12,00,000
(Note – 1)
To cost incurred 11,20,000 Work not certified ₹1,20,000 13,20,000
To notional profit c/d 2,00,000
Total 13,20,000 Total 13,20,000
To P & L account (Note – 2) 1,20,000 By notional profit b/d 2,00,000
To work in progress a/c (Bal. figure)
(Note – 3) 80,000
Total 2,00,000 Total 2,00,000
Note – 1: Cash received is given ₹10,80,000 which is 90% of the work certified. So, work certified can be calculated as
follows—
10,80,000 100
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑤𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 = 𝑜𝑟 2,40,000 × = ₹12,00,000
90% 90
Note – 2: Percentage of the work certified to the contract price is 60% i.e. ₹12,00,000 / ₹20,00,000  100. Because the value
of work certified is equal to or more than ½ of the contract price but less than 90% of the contract price so profit (which is
to be transferred to the P & L a/c) shall be calculated using the following formula—
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
2 10,80,000
= 2,00,000 × × = ₹1,20,000
3 20,00,000
Note – 3: Amount which is to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹2,00,000 – ₹1,20,000 = ₹80,000

Illustration 10 (Illustration 8.5 of Maheshwari Mittal)

Contract price is ₹50,000. ¾th of the work has been approved by the contractee. The costs incurred so far for contract A are
₹25,000. It is estimated that ₹5,000 will be required further to complete the contract. The contractee pays 80% of the work
certified by him. Calculate the figure of profit which you consider reasonable to be taken to the credit of the profit and lo ss
account.

P a g e | 21
Solution
Contract Account
For the year ending ……………
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹37,500
To cost incurred 25,000 Work not certified ₹0 37,500
To notional profit c/d 12,500
Total 37,500 Total 37,500
To P & L account (Note – 1) 12,000 By notional profit b/d 12,500
To work in progress a/c (Bal. figure) 500
(Note – 2)
Total 12,500 Total 12,500
Note – 1: Percentage of the work certified to the contract price is ¾ . Because the value of work certified is equal to or more
th

than ½ of the contract price but less than 90% of the contract price so profit (which is to be transferred to the P & L a/c)
shall be calculated using the following formula—
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
But in this question estimated cost is given though the work certified is not equal to or more than 90% of the contract price,
so profit shall be estimated and the appropriate formula shall be used to calculate the amount which is to be transferred to
the profit and loss account (click here to see the rule).
𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 30,000
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 × = 20,000 × = ₹12,000
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 50,000
Note – 2: Estimated Profit = Contract Price – Estimated Cost
= ₹50,000 – (₹25,000 already incurred + ₹5,000 to be incurred)
= ₹20,000
80 80
Note – 3: Cash Received = 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 × 100 = 37,500 × 100 = ₹30,000
3
Note – 4: Work Certified = 𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 × 4 = ₹37,500
Note – 5: Amount to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹12,500 – ₹12,000 = ₹500

Illustration 11 (8.7 of Maheshwari-Mittal)

Modern construction limited has taken two contracts on 1 st October 2017. The position of contracts as on 30 th September
2018 was as follows—
Particulars Contract – I (₹) Contract – II (₹)
Contract price 27,00,000 60,00,000
Materials 5,80,000 10,80,000
Wages paid 11,24,000 16,50,000
Other expenses 28,000 60,000
Plant at site (Cost) 1,60,000 3,00,000
Unused material at site 40,000 60,000
Wages payable (outstanding) 36,000 54,000
Other expenses due (outstanding) 4,000 9,000
Work certified 16,00,000 30,00,000
Cash received 12,00,000 22,50,000
Work completed but not yet certified 80,000 90,000
The plant at site is to be depreciated at 10%. Prepare the contract account in respect of each contract showing the notional
profit and the profit to be transferred to P & L a/c.

Solution
Contract Account
For the year ending on 30th September 2018
Contract – I Contract – II Contract – I Contract – II
Particulars (₹) (₹) Particulars (₹) (₹)
To Materials 5,80,000 10,80,000 By work in progress:
P a g e | 22
 To Wages paid 11,24,000 16,50,000 Work certified 16,00,000 30,00,000
To Wages payable 36,000 54,000 Work not certified 80,000 90,000
To Depreciation on plant
(Note – 1) 16,000 30,000 By material at site 40,000 60,000
To Other expenses 28,000 60,000 By P & L a/c (Note – 2) 68,000
To Other expenses due 4,000 9,000
To notional profit c/d 2,67,000
Total 17,88,000 31,50,000 Total 17,88,000 31,50,000
To P & L a/c (Note – 3) 1,33,500 By notional profit b/d 2,67,000
To work in progress (Note
– 4) 1,33,500
Total 2,67,000 Total 2,67,000
Note – 1: The depreciation has been calculated at 10%. Time factor has been ignored as per annum is not given with the
rate. Further, we have debited the depreciation only and not the cost and WDV of the plant. Alternatively, the cost of the
plant can be debited to the contract account and the WDV can be credited as follows—
Contract – I Contract – II Contract – I Contract – II
Particulars (₹) (₹) Particulars (₹) (₹)
To plant 1,60,000 3,00,000 By plant at site (WDV) 1,44,000 2,7,000
Plant at site for contract – I: Cost – Depreciation @ 10% = ₹1,60,000 – 16,000 = ₹1,44,000
Plant at site for contract – II: Cost – Depreciation @ 10% = ₹3,00,000 – 30,000 = ₹2,70,000
Note-2: In case of contract – I the debit side is more than the credit side so loss is there and such loss shall be transferred to
the P & L a/c.
Note – 3: Percentage of the work certified to the contract price is 59.26% i.e. ₹16,00,000 / ₹27,00,000  100. Because the
value of work certified is equal to or more than ½ of the contract price but less than 90% of the contract price so profit
(which is to be transferred to the P & L a/c) shall be calculated using the following formula—
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
2 12,00,000
= 2,67,000 × × = ₹1,33,500
3 16,00,000
Note – 4: Amount which is to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹2,67,000 – ₹1,33,500 = ₹1,33,500

Illustration 12: When the work certified is less than ¼ th of the contract price)
Particulars Case – 1 (₹) Case – 2 (₹)
Contract price 10,00,000 10,00,000
Work certified 2,40,000 2,40,000
Work not certified 10,000 10,000
Cost incurred 2,00,000 2,60,000

Solution
Case – 1 (When the credit side is more than the debit side)
Contract Account
For the year ending 31 st March 20xx
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹2,40,000
To cost incurred 2,00,000 Work not certified ₹10,000 2,50,000
To work in progress a/c (Note) 50,000
Total 2,50,000 Total 2,50,000
Note: In this case the work certified is 24% of the contract price, so, it’s less than ¼ th of the contract price. In this case
notional profit shall not be calculated and whole of the balance shall be transferred to the Work in Progress Account (only
in case the total of credit side is more than the debit side).
Case – 2 (When the debit side is more than the credit side)
Contract Account
For the year ending 31 st March 20xx

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 Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹2,40,000
To cost incurred 2,60,000 Work not certified ₹10,000 2,50,000
By P & L a/c (Note) 10,000
Total 2,60,000 Total 2,60,000
Note: In this case the work certified is 24% of the contract price, so, it’s less than ¼ th of the contract price. In this case the
debit side is more than credit side, so loss is there and it shall be transferred to the P & L a/c.

Illustration 13
Prepare the contract account with the help of following—
Direct material ₹28,000
Wages ₹22,000
Special plant ₹18,000
Stores issued ₹9,000
Loose tools ₹2,500
Cost of tractor used ₹1,20,000
Fuel for tractor ₹4,000
Wages of tractor driver ₹8,000
The contract was completed in 26 weeks at the end of which plant was returned subject to a depreciation of 20% on the
original cost. The value of loose tools and stores returned were ₹500 and ₹1,000 respectively. The tractor is subject to a
depreciation of 20% per annum. Provide office overheads at 10% of the works/factory cost. The contract was agreed to be
performed at a profit of 25% of the total cost.

Solution
In this some important points are there which are—
1. It’s a cost-plus contract. So, the contract price shall be calculated by adding the profit of 25% to the total cost.
2. Tractor shall be treated like plant. Either the cost can be debited and WDV can be credited or only the amount of
the depreciation can be debited. Further, the expenses of the tractor like fuel and driver’s wages shall also be
debited.
3. (This contract is completed) In this question office overheads are 10% of the works/factory cost. How can the
works/factory cost be calculated? It’s very easy. First of all, prepare the contract account as usual but do not
credit the amount of the contract price. Now calculate the balance of the contract account (debit side will
be more than the credit side). This balance is the works/factory cost. Then brought down this balance and
calculate the office overheads at 10% of the works/factory cost. Debit these office overheads and calculate
the total cost. Brought down this total cost and calculate profit at 25% on total cost. Debit this profit. Now
you will get a balancing figure on the credit side which is the contract price.
4. (In case of incomplete contracts) First of all prepare the contract account as usual but do not credit the work
certified and work not certified. Now calculate the balance of the contract account (debit side will be more
than the credit side). This balance is the works/factory cost. Then brought down this balance and calculate
the office overheads at 10% of the works/factory cost. Debit these office overheads and credit the work
certified and work not certified (if these are given). If credit side is more than the debit side then notional
profit is there and then it should be bifurcated in two parts as usual. Transfer one part to the P & L a/c using
the formulae discussed earlier and transfer the balance to the work in progress a/c. But if the debit side is
more than the credit side then there is loss and such loss shall be transferred to the P & L a/c.
Contract Account
For the year ending ……………
Amount Amount
Particulars (₹) Particulars (₹)
By plant returned:
Cost ₹18,000
To direct material 28,000 Less: Depreciation (₹3,600) (Note – 1) 14,400
To wages 22,000 By stores returned (WDV given) 500
To special plant 18,000 By loose tools returned (WDV given) 1,000
By tractor returned:
Cost ₹1,20,000
To stores issued 9,000 Less: Depreciation (₹12,000) (Note – 2) 1,08,000
To loose tools 2,500

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 To cost of tractor 1,20,000
To fuel for tractor 4,000
Wages of tractor driver 8,000 By works/factory cost c/d 87,600
Total 2,11,500 Total 2,11,500
To works/factory cost b/d 87,600
To office overheads (Note – 3) 8,760 By total cost c/d 96,360
Total 96,360 Total 96,360
To total cost b/d 96,360 By contractee account (Balancing figure) (Note – 5) 1,20,450
To profit (Note – 4) 24,090
Total 1,20,450 Total 1,20,450
Note – 1: Depreciation on special plant shall be calculated at 20% (ignoring the time factor as per annum is not given with
the rate). Depreciation would be ₹3,600 (₹18,000  20 / 100).
Note – 2: Depreciation on tractor has been calculated for 26 weeks (on the basis of time as the per annum is given with the
rate). Depreciation would be ₹12,000 (₹1,20,000  20 / 100  26 Weeks / 52 Weeks).
Note – 3: Office overheads are 10% of the works cost so the amount would be ₹8,760 (₹87,600 i.e. works cost  10 / 100).
Note – 4: Profit is 25% on cost so the amount would be ₹24,090 (₹1,20,450 i.e. Total cost  25 / 100).
Note – 5: As this is a cost-plus contract. So, the contract price has been calculated by adding the profit of 25% to the total
cost (or the balancing figure is the contract price).

P a g e | 25
Day – 4

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Illustration 14 (Illustration 8.9 of Maheshwari Mittal)
The Hindustan Construction Company Limited has undertaken the construction of a bridge over the river Yamuna for
municipal corporation. The value of the contract is ₹12,50,000 subjects to a retention of 20% until one year after the certified
completion of the contract, and final approval of the corporation’s engineer. The following are the details as shown in the
books on 30th June 2000—
Labour on site ₹4,05,000
Material direct to site less returns ₹4,20,000
Material received from stores ₹81,200
Hire and use of plant – plant upkeep account ₹12,100
Direct expenses ₹23,000
General overheads allocated to the contract ₹37,100
Material in hand on 30 th June 2000 ₹6,300
Wages accrued/outstanding on 30 th June 2000 ₹7,800
Direct expenses accrued/outstanding on 30 th June 2000 ₹1,600
Work not yet certified by the Corporation Engineer ₹16,500
Amount certified by the Corporation Engineer ₹11,00,000
Cash received on account ₹8,80,000
Prepare (a) Contract account; (b) Contractee’s account; (c) work-in-progress account; and (d) how the relevant items would
appear in the Balance Sheet.

Solution
Contract Account
For the year ending 30 th June 2000
Amount
Particulars (₹) Particulars Amount (₹)
To labour on site ₹4,05,000
Add: Outstanding ₹7,800 4,12,800 By material in hand 6,300
By work in progress: (Note – 5)
Work certified ₹11,00,000
To material direct to site less returns 4,20000 Work not certified ₹16,500 11,16,500
To material received from store 81,200
To hire and use of plant – plant upkeep
account 12,100
To direct expenses ₹23,000
Add: Outstanding ₹1,600 24,600
To general overhead allocated to the Contract 37,100
To notional profit c/d (Note – 1) 1,35,000
Total 11,22,800 Total 11,22,800
To P & L a/c (Note – 2) 72,000 By notional profit b/d 1,35,000
To work in progress account (Note – 3 and 6) 63,000
Total 1,35,000 Total 1,35,000

Contractee Account
For the year ending 30 th June March 2000
Particulars Amount (₹) Particulars Amount (₹)
To balance c/d 8,80,000 By bank account (Note – 4) 8,80,000
Total 8,8,0000 Total 8,80,000

Work in progress Account

For the year ending 30 th June March 2000
Particulars Amount (₹) Particulars Amount (₹)
To contract account (Note – 5)
Work certified ₹11,00,000 By contract account (transfer to reserve)
Work not certified ₹16,500 11,16,500 (Note – 6) 63,000
By balance c/d 10,53,500
Total 11,16,500 Total 11,16,500

P a g e | 27
 Balance sheet as on 30 th June March 2000
Liabilities Amount (₹) Assets Amount (₹)
Work in progress: (Note – 7)
Work certified ₹11,00,000
Add: work not certified ₹16,500
₹11,16,500
Less: Transfer to reserve (₹63,000)
₹10,53,500
Less: Cash received (₹8,80,000)
Wages accrued 7,800 (Note – 8) 1,73,500
Direct expenses accrued 1,600 Material in hand 6,300
Profit and loss a/c 72,000
Total -NA- Total -NA-
Note – 1: The percentage of the work certified to the contract price is 88% and the credit side of the contract side is more
than the debit side so notional profit is there.
Note – 2: Percentage of the work certified to the contract price is 88% i.e. ₹11,00,000 / ₹12,50,000  100. Because the value
of work certified is equal to or more than ½ of the contract price but less than 90% of the contract price so profit (which is
to be transferred to the P & L a/c) shall be calculated using the following formula—
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
2 8,80,000 2 80 (Percentage of the cash received)
= 1,35,000 × × or 1,35,000 × × = ₹72,000
3 11,00,000 3 100
Note – 3: Amount which is to be transferred to the work in progress account—
= Notional Profit – Amount transferred to the P & L a/c
= ₹1,35,000 – ₹72,000 = ₹63,000
Note – 4: Cash received from the contractee is 80% of the work certified, so it would be ₹11,00,000  80 / 100 = ₹8,80,000
(it’s already given in the question). Journal entry to receive cash is—
Cash a/c Dr. ₹8,80,000
To Contractee a/c ₹8,80,000
(Being cash received from the contractee)
We have just posted this journal entry in the contractee account. After posting the journal entry calculate the balance of the
contractee account which would be ₹8,80,000.
Note – 5: The journal entry for the recording of the work in progress account (work certified + work not certified) is—
Work in progress a/c Dr. ₹11,16,500
To Contract a/c ₹11,16,500
(Being work in progress transferred to the contract account)
Now post this entry in to the contract and work in progress account.
Note – 6: The amount we transfer to the reserve (work in progress account), the journal entry for that is—
To Contract a/c ₹63,000
Work in progress a/c Dr. ₹63,000
(Being part of the notional profit transferred to the reserve/work in progress account)
Now post this entry in to the contract and work in progress account. Then calculate the balance of the work in progress
account which would be ₹10,53,600.
Note – 7: We can also show the balance of the work in progress in the balance sheet as follows—
Balance sheet as on 30 th June March 2000
Liabilities Amount (₹) Assets Amount (₹)
Work in progress ₹10,53,500
Less: Cash received (₹8,80,000) 1,73,500
Total -NA- Total -NA-
Note – 8: This is the balance of the contractee account. Alternatively, this can be shown on the liabilities side.

P a g e | 28
Illustration 15 (Illustration Number 8.11 of Maheshwari Mittal)
The following information relates to a building contract for ₹10,00,000—

2005 2006
Particulars ₹ ₹
Material issued 3,00,000 84,000
Direct wages 2,30,000 1,05,000
Direct expenses 22,000 10,000
Indirect expenses 6,000 1,400
Work certified 7,50,000 10,00,000
Work uncertified 8,000 --
Material at site 5,000 7,000
Plant issued 14,000 2,000
Cash received from contractor 6,00,000 10,00,000
The value of plant at the end of 2005 and 2006 was ₹7,000 and ₹5,000 respectively. Prepare (i) Contract Account, (ii)
Contractee Account for two years i.e. 2005 and 2006 taking into consideration such profit for transfer to Profit and Loss
Account as you think proper.

Solution
When the contract account is to be prepared for more than one year then some important points are to be kept in mind in
such questions which are:
1. Prepare the contract account, work in progress account and the contractee account for every year.
2. In the 2nd year we take the Work Certified on the credit side of the contract account but is should be cumulative
basis i.e. Work Certified of the First Year + Work Certified of the Second Year.
3. The work in progress of 1 st year shall be transferred to the debit side of the 2 nd year’s contract account on the first
day of the 2nd year. (This process is called passing of the reversing journal as no balance of the work in progress is
maintained on the first day of the 2 nd year).
4. The work in progress of 2 nd year shall be transferred to the debit side of the 3 rd year’s contract account on the first
day of the 3rd year. (This process is called passing of the reversing journal as no balance of the work in progress is
maintained on the first day of the 3 rd year).
5. In the last year i.e. year of completion, there will be no work in progress. In this year we credit the contract account
by the contract price.
6. The plant at site, material at site and prepaid expenses at site at the end of the 1st year shall be debited to the 2 nd
year’s contract account at their WDV on the first day of the 2nd year.
7. The plant at site, material at site and prepaid expenses at site at the end of the 1 st year shall be debited to the 3 rd
year’s contract account on the first day of the 3 rd year.
8. In the last year all unused material and remaining plant shall be returned to the stores.
9. Any outstanding expense at the end of the 1 st year shall be credited to the 2 nd year’s contract account on the first
day of the 2nd year.
10. Any outstanding expense at the end of the 2 nd year shall be credited to the 3 rd year’s contract account on the first
day of the 3rd year.
11. Every year (except last year) notional profit shall be calculated and shall be bifurcated in two parts. One part is
transferred to the P & L a/c and remaining portion is transferred to the work in progress account.
12. In the year of completion there will be no notional profit. Any profit or loss shall be transferred to the P & L a/c.
Contract Account
For the year ending 31st December 2005
Particulars Amount (₹) Particulars Amount (₹)
To material issued 3,00,000 By material at site 5,000
To direct wages 2,30,000 By work in progress: (1)
To direct expenses 22,000 Work certified ₹7,50,000
To indirect expenses 6,000 Work not certified ₹8,000 7,58,000
To plant issued 14,000 By plant at site:
To notional profit c/d 1,98,000 Cost ₹14,000
Less: Depreciation (₹7,000) 7,000
Total 7,70,000 Total 7,70,000
To P & L a/c (2) (Note – 1) 1,05,600 By notional profit b/d 1,98,000
To work in progress account (3) (Note –
2) 92,400

P a g e | 29
 Total 1,98,000 Total 1,98,000

Contract Account
For the year ending 31 st December 2006
Particulars Amount (₹) Particulars Amount (₹)
To work in progress account (5) 6,65,600 By material at site 7,000
To material at site b/d 5,000 By plant at site:
To plant at site b/d 7,000 Cost ₹7,000 + ₹2,000
To material issues 84,000 Less: Dep. (₹4,000) 5,000
To direct wages 1,05,000 By contractee account (6) 10,00,000
To direct expenses 10,000
To indirect expenses 1,400
To plant issued 2,000
To P & L a/c (7) 1,32,000
Total 10,12,000 Total 10,12,000

Work in progress account

Amount Amount
Date Particulars (₹) Date Particulars (₹)
31-12-
To contract account (1) 2005 By contract account (Reserve) (3) 92,400
31-12- (Work certified + Work not 31-12-
2005 certified) 7,58,000 2005 By balance c/d 6,65,600
Total 7,58,000 Total 7,58,000
01-01- 01-01-
2006 To balance b/d 6,65,600 2006 By contract account (5) 6,65,600
Total 6,65,600 Total 6,65,600

Contractee account
Amount Amount
Date Particulars (₹) Date Particulars (₹)
31-12- 31-12-
2005 To balance c/d 6,00,000 2005 By cash account (4) 6,00,000
Total 6,00,000 Total 6,00,000
31-12- 01-01-
2006 To contract account (6) 10,00,000 2006 To balance b/d 6,00,000
31-12- By cash account (Balancing figure)
2006 (8) 4,00,000
Total 10,00,000 Total 10,00,000

Journal entries for Work in progress, profit and loss, and cash received from the contractee, etc.
Sr. Date Particulars L. Amount Amount
No. F. (₹) (₹)
1 31-12- Work in progress a/c Dr. 7,58,000
2005 To Contract a/c 7,58,000
Narration: Being work in progress transferred to the contract
account.
2 31-12- Contract a/c Dr. 1,05,600
2005 To P & L a/c 1,05,600
Narration: Being notional profit transferred to the profit and loss
account.
3 31-12- Contract a/c Dr. 92,400
2005 To Work in progress a/c 92,400
Narration: Being part of notional profit transferred to reserve (work
in progress account)

P a g e | 30
 4 31-12- Cash a/c Dr. 6,00,000
2005 To Contractee a/c 6,00,000
Narration: Being cash received from the contractee.
5 01-01- Contract a/c Dr. 6,65,600
2006 To work in progress a/c 6,65,600
Narration: Being reversing journal passed or Being work in progress
on 31st December 2005 transferred to the contract account on 1st
January 2006.
6 31-12- Contractee a/c Dr. 10,00,000
2006 To Contract a/c 10,00,000
Narration: Being contract completed or Being the contract price
receivable from the contractee.
7 31-12- Contract a/c Dr. 1,32,000
2006 To P & L a/c 1,32,000
Narration: Profit on completion of contract transferred to the profit
and loss account.
8 31-12- Cash a/c Dr. 4,00,000
2006 To Contractee a/c 4,00,000
Narration: Being the balance amount received from the contractee.
Post all the above entries in the concerned accounts. In case you are not able to understand any posting in any
account then please refer to the above journal entries.
Note – 1: Percentage of the work certified to the contract price is 75% i.e. ₹7,50,000 / ₹10,00,000  100. Because the value
of work certified is equal to or more than ½ of the contract price but less than 90% of the contract price so profit (which is
to be transferred to the P & L a/c) shall be calculated using the following formula:
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
2 6,00,000
= 1,98,000 × × = ₹1,05,600
3 7,50,000
Note – 2: Amount which is to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹1,98,0000 – ₹1,05,600 = ₹92,400

Illustration 16 (Illustration Number 8.12 of Maheshwari Mittal)

Illustration 8.12. Mr. Richardson undertook a contract for ₹75,00,000 on an arrangement that 80% of the value of the work
done, as certified by the architects of the contractee should be paid immediately, and the remaining 20% to be retained until
the contract was completed.
In 2004, the amounts expended were: Materials, ₹9,60,000, Wages ₹8,50,000, Carriage ₹30,000, cartage ₹5,000, Sundry
Expenses ₹35,000. The work certified for ₹18,75000 and 80% was paid as agreed.

In 2005, the amounts expended were: Material ₹11,00,000, Wages ₹11,50,000, Carriage ₹1,15,000, Cartage ₹10,000, Sundry
Expenses ₹20,000. Three-fourth of the contract was certified as done by 31 st December and 80% of this was received
accordingly. The value of the unused stock and work-in-progress uncertified was ascertained at ₹1,00,000.

In 2006, the amounts expended were: Materials ₹6,30,000, Wages ₹8,50,000, Cartage ₹30,000, Sundry Expenses ₹15,000.
The whole contract was completed on 30 th June.
Show how the contract account, work-in-progress account and the contractee’s account would appear in each of these years
in the books of the contractor assuming that balance due to him was received on completion of the contract. Also show the
relevant items in the Balance Sheet.

Solution
When the contract account is to be prepared for more than one year then some important points are to be kept in mind in
such questions which are—
1. Prepare the contract account, work in progress account and the contractee account for every year.
2. In the 2nd year we take the Work Certified on the credit side of the contract account but is should be cumulative
basis i.e. Work Certified of the First Year + Work Certified of the Second Year.
3. The work in progress of 1 st year shall be transferred to the debit side of the 2 nd year’s contract account on the first
day of the 2nd year. (This process is called passing of the reversing journal as no balance of the work in progress is
maintained on the first day of the 2 nd year).

P a g e | 31
 4. The work in progress of 2 nd year shall be transferred to the debit side of the 3 rd year’s contract account on the first
day of the 3rd year. (This process is called passing of the reversing journal as no balance of the work in progress is
maintained on the first day of the 3 rd year).
5. In the last year i.e. year of completion, there will be no work in progress. In this year we credit the contract account
by the contract price.
6. The plant at site, material at site and prepaid expenses at site at the end of the 1 st year shall be debited to the 2 nd
year’s contract account at their WDV on the first day of the 2 nd year.
7. The plant at site, material at site and prepaid expenses at site at the end of the 1 st year shall be debited to the 3 rd
year’s contract account on the first day of the 3 rd year.
8. In the last year all unused material and remaining plant shall be returned to the stores.
9. Any outstanding expense at the end of the 1 st year shall be credited to the 2 nd year’s contract account on the first
day of the 2nd year.
10. Any outstanding expense at the end of the 2 nd year shall be credited to the 3 rd year’s contract account on the first
day of the 3rd year.
11. Every year (except last year) notional profit shall be calculated and shall be bifurcated in two parts. One part is
transferred to the P & L a/c and remaining portion is transferred to the work in progress account.
12. In the year of completion there will be no notional profit. Any profit or loss shall be transferred to the P & L a/c.
Contract Account
For the year ending 31 st December 2014
Particulars Amount (₹) Particulars Amount (₹)
To materials 9,60,000 By work in progress:
To wages 8,50,000 Work certified ₹18,75,000
To carriage 30,000 Work not certified ₹0 18,75,000
To cartage 5,000 By P & L a/c (Note – 1) 5,000
To sundry expenses 35,000
Total 18,80,000 Total 18,80,000

Contract Account
For the year ending 31 st December 2015
Particulars Amount (₹) Particulars Amount (₹)
To work in progress account 18,75,000 By work in progress: (Note – 2)
To materials 11,00,000 Work certified (2014) ₹18,75,000
To wages 11,50,000 Work certified (2015) ₹37,50,000
To carriage 1,15,000 Work not certified ₹1,00,000 57,25,000
To cartage 10,000
To sundry expenses 20,000
To notional profit c/d 14,55,000
Total 57,25,000 Total 57,25,000
To P & L a/c (Note – 3a) 7,76,000 By balance b/d 14,55,000
To work in progress a/c (Note – 3b) 6,79,000
Total 14,55,000 Total 14,55,000

Contract Account
For the year ending 31 st December 2016
Particulars Amount (₹) Particulars Amount (₹)
To work in progress account 50,46,000 By contractee a/c (Note – 4) 75,00,000
To materials 6,30,000
To wages 8,50,000
To cartage 30,000
To sundry expenses 15,000
To P & L a/c 9,29,000
Total 75,00,000 Total 75,00,000

Work in progress account

P a g e | 32
 Amount Amount
Date Particulars (₹) Date Particulars (₹)

31-12-
31-12-2014 To contract account (1) 18,75,000 2005 By balance c/d 18,75,000
Total 18,75,000 Total 18,75,000
01-01-
01-01-2015 To balance b/d 18,75,000 2015 By contract account (Note – 5) 18,75,000
31-12-
31-12-2015 To contract a/c 57,25,000 2015 By contract a/c 6,79,000
31-12-
2015 By balance c/d 50,46,000
Total 76,00,000 Total 76,00,000
01-01-
01-01-2016 To balance b/d 50,46,000 2016 By contract a/c (Note – 6) 50,46,000
Total 50,46,000 Total 50,46,000

Note – 1: Since the debit side is more than the credit side so loss is there and the same has been transferred to the P & L a/c.
Note – 2:
Work Certified in 2015 (2/3 rd of the Contract Price i.e. 75,00,000  2 / 3) ₹56,25,000
Less: Work certified in 2016 ₹18,75,000
Work Certified for the year 2015 ₹37,50,000
Note – 3a: The work certified is 2/3 of the Contract Price i.e. ₹56,25,000 (₹75,00,000  2 / 3) or the percentage of the work
rd

certified to the contract price is 66.67% i.e. ₹56,25,000 / ₹75,00,000  100. Because the value of work certified is equal to
or more than ½ of the contract price but less than 90% of the contract price so profit (which is to be transferred to the P &
L a/c) shall be calculated using the following formula:
2 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
2 80
= 14,55,000 × × = ₹7,76,000
3 100
Note – 3b: Amount which is to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹14,55,0000 – ₹7,76,000 = ₹6,79,000
Note – 4:
As in the year 2016 the contract is being completed so the journal entry would be
Sr. 31-12-2016 Contractee a/c Dr. 75,00,000
No. To Contract a/c 75,00,000
Note – 5:
On the very first day of the year 2015 the balance of the work in progress has been transferred to the debit side of the
contract account. This journal entry is called Reversing Journal.
Sr. 01-01-2015 Contract a/c Dr. 18,75,000
No. To Work-in-progress a/c 18,75,000
Note – 6:
On the very first day of the year 2016 the balance of the work in progress has been transferred to the debit side of the
contract account. This journal entry is called Reversing Journal.
Sr. 01-01-2016 Contract a/c Dr. 50,46,000
No. To Work-in-progress a/c 50,46,000

P a g e | 33
Illustration 17 (Illustration Number 8.14 of Maheshwari Mittal)
Contractors Limited began to trade on January 1, 2006. During 2006 the company was engaged on only one contract of which
the contract price was ₹5,00,000.
Of the plant and materials charged to the contract, plant which costs ₹5,000 and materials which costs ₹4,000 were lost in
an accident (in the beginning).
On December 31, 2006 plant which costs ₹5,000 was returned to the store, the cost of work done but uncertified was ₹2,000
and materials costing ₹4,000 were in hand on site.
Charge depreciation on plant at 10%. Credit the profit and loss account with two-third of the profit received and compile
contract account and balance sheet from the following—
TRIAL BALANCE AS ON DECEMBER 31, 2006

Particulars ₹ ₹
Share capital 1,20,000
Creditors 10,000
Cash received on contract (80% of work certified) 2,00,000
Land and building, etc. 43,000
Bank balances 25,000
Charged to contract—
Materials 90,000
Plant 25,000
Wages 1,40,000
Expenses 7,000
Total 3,30,000 3,30,000

Solution
When in the question Share capital, other liabilities, cash, etc. are given then total of the balance sheet will match. The o nly
issue in this question is the preparation of the balance sheet.
CONTRACT ACCOUNT
Particulars Amount (₹) Particulars Amount (₹)
To material 90,000 By work in progress account:
To plant 25,000 Work certified 2,50,000
To wages 1,40,000 Work uncertified 2,000 2,52,000
To expenses 7,000 By profit and loss account (abnormal loss):
to notional profit c/d 21,000 Plant lost 5,000
Material lost 4,000 9,000
By plant returned to store (5,000-500 Dep) 4,500
By plant at site ((25,000-5,000-5,000)- 13,500
1,500 Dep)
By material at site 4,000
Total 2,83,000 Total 2,83,000
To profit and loss account 11,200 By notional profit b/d 21,000
2 ₹2,00,000
(21,000 × × )
3 ₹2,50,000
To work-in-progress account (balance) 9,800
Total 21,000 Total 21,000
BALANCE SHEET
Liabilities Amount (₹) Assets Amount (₹)
Share capital 1,20,000 Land and building 43,000
Profit and loss account: Plant:
Profit on contract 11,200 At site 13,500
Less: Plant lost -5,000 In store 4,500 18,000
Less: Material lost -4,000 2,200 Material at site 4,000
Creditors 10,000 Work in progress 2,42,200
Less: Cash received -2,00,000 42,200
Bank balance 25,000
Total 1,32,200 Total 1,32,200

P a g e | 34
Illustration 18 (Illustration Number 8.15 of Maheshwari Mittal)
The following is the trial balance of Premier Construction Company, engaged in the execution of Contract No. 747, for the
year ended December 31, 2016—
TRIAL BALANCE AS ON DECEMBER 31, 2016

Particulars ₹ ₹
Contractee’s account 3,00,000
Building 1,60,000
Creditors 72,000
Bank balance 35,000
Capital account 5,00,000
Materials 2,00,000
Wages 1,80,000
Expenses 47,000
Plant 2,50,000
Total 8,72,000 8,72,000
The work on Contract No. 747 was commenced on January 1, 2016. Materials costing ₹1,70,000 were sent to the site of the
contract but those of ₹6,000 were destroyed in an accident. Wages of ₹1,80,000 were paid during the year. Plant costing
₹50,000 was used on the contract all through the year. Plant with a cost of ₹2 lakhs was used from January 1 to September
30 and was then returned to the stores. Materials of the cost of ₹4,000 were at site on December 31, 2016.
The contract was of ₹6,00,000 and the contractee pays 75% of the work certified. Work certified was 80% of the total
contract work at the end of 2016. Uncertified work was estimated at ₹15,000 on December 31, 2016. Expenses are charged
to the contract at 25% of Wages. Plant is to be depreciated at 10% for the entire year. Prepare Contract No. 747 Account
for the year 2016 and make out the Balance Sheet as at 31 st December 2016 in the books of Premier Construction Co.

Solution
In this question share capital, other liabilities, cash, etc. are given so the total of the balance sheet will match. The onl y issue
in this question is the preparation of the balance sheet and the treatment of the unabsorbed or under absorbed expenses.

Calculation of the Unabsorbed Expenses Given in the balance Sheet:

Expenses given in the trial balance (Actual) ₹47,000
Less: Expenses absorbed in contract account i.e. 25% of Wages (₹1,80,000  25 / 100) ₹45,000
Under Absorption ₹2,000

Disposal of under or over absorption: There are three methods for the disposal of the under/over absorbed overheads.
These are as follows:
1. Carrying over of overheads: Seasonal factory, output is affected by business cycles or new project.
2. Use of supplementary rates: Serious error or the difference is large
3. Transfer to profit and loss account: When the amount is not very large or the difference is due to abnormal
reasons.

In this question, it seems that the amount of under absorbed overheads is not very large, so the amount of ₹2,000 has been
subtracted from the Profit and Loss Account. Though in the solution given in the book it is stated that ₹2,000 may be
carried over/forward to the next year but we cannot carry forward it because there are certain conditions for carrying
over the over/under absorbed amount and none of those conditions is being satisfied.
CONTRACT ACCOUNT
Particulars Amount (₹) Particulars Amount (₹)
To material 1,70,000 By work in progress account:
To wages 1,80,000 Work certified 4,80,000
To expenses (25% of wages) 45,000 Work uncertified 15,000 4,95,000
To plant 2,50,000 By profit and loss account (abnormal loss):
to notional profit c/d 90,000 Material lost 6,000 6,000
By plant at site (50,000-5,000 Dep) 45,000
By plant returned to store (2,00,000-15,000 1,85,000
Dep for 9 months)
By material at site 4,000
Total 7,35,000 Total 7,35,000

P a g e | 35
 To profit and loss account (90,000 × ×
2 45,000 By notional profit b/d 90,000
3
75%)
To work-in-progress account (balance) 45,000
Total 90,000 Total 90,000
BALANCE SHEET
Liabilities Amount (₹) Assets Amount (₹)
Capital 5,00,000 Buildings 1,60,000
Profit and loss account: Plant:
Profit on contract 45,000 At site 45,000
Less: Dep on plant -5,000 In store 1,80,000 2,25,000
Less: Material lost -6,000 Material: 4,000
Less: Unabsorbed Exp. -2,000 32,000 At site 4,000
Creditors 72,000 In store 30,000 34,000
Work in progress 4,50,000
Less: Cash received -3,00,000 1,50,000
Bank balance 35,000
Total 6,04,000 Total 6,04,000

Illustration 19 (Illustration 3 of Dr. Surender Singh)

The following information relates to a contract undertaken by a Company for ₹80 lakhs—

Particualrs 2016 2017 2018

Material sent to site 9,70,000 12,50,000 6,90,000
Wages incurred 8,30,000 9,60,000 6,00,000
Expenses 40,000 60,000 30,000
Plant issued to site 10,00,000 2,00,000 NIL
Material at site 20,000 1,20,000 10,000
(Return to store)
Work certified 18,00,000 60,00,000 80,00,000
Work uncertified 80,000 90,000 NIL
The work on contract commenced on January 1, 2016 and the plants were issued at the beginning of each year. Depreciation
on plant was charged at 20% per annum. The contractee has paid 90% of the work certified every year and settled the
account on June 30, 2018, the date of completion of the contract. Prepare contract account, contractee’s account and work-
in-progress account for the year 2016, 2017 and ending on December 31.

Solution
CONTRACT ACCOUNT FOR THE YEAR ENDING DECEMBER 31, 2016
Particulars Amount (₹) Particulars Amount (₹)
To material sent to site 9,70,000 By work in progress:
To plant issued 10,00,000 Work certified 18,00,000
To wages 8,30,000 Work uncertified 80,000 18,80,000
To expenses 40,000 By plant at site (10,00,000-2,00,000 Dep.) 8,00,000
By material at site 20,000
By profit and loss account (loss on contract) 1,40,000
Total 28,40,000 Total 28,40,000

CONTRACT ACCOUNT FOR THE YEAR ENDING DECEMBER 31, 2017

Particulars Amount (₹) Particulars Amount (₹)
To work-in-progress account (b/d) 18,80,000 By work in progress:
To plant at site (b/d) 8,00,000 Work certified (2016) 18,00,000
To material at site (b/d) 20,000 Work certified (2017) 42,00,000
To plant issued 2,00,000 Work uncertified 90,000 60,90,000
To material sent to site 12,50,000 By plant at site (10,00,000-2,00,000 Dep.) 8,00,000
To wages 9,60,000 By material at site 1,20,000

P a g e | 36
 To expenses 60,000
To notional profit c/d 18,40,000
Total 70,10,000 Total 70,10,000
To profit and loss account (18,40,000 × 11,04,000 By notional profit b/d 18,40,000
2
3
× 90%)
To work-in-progress account (balance) 7,36,000
Total 18,40,000 Total 18,40,000

CONTRACT ACCOUNT FOR THE YEAR ENDING DECEMBER 31, 2018

Particulars Amount (₹) Particulars Amount (₹)
To work-in-progress account (b/d) 53,54,000 By contractee’s account (contract price) 80,00,000
To plant at site (b/d) 8,00,000 By plant returned (8,00,000-80,000 Dep.) 7,20,000
To material at site (b/d) 1,20,000 By material returned to store 10,000
To material sent to site 6,90,000
To wages 6,00,000
To expenses 30,000
To profit and loss account 11,36,000
Total 87,30,000 Total 87,30,000

CONTRACTEE’S ACCOUNT FOR THE YEAR ENDING DECEMBER 31, 2016, 2017 and 2018
Date Particulars Amount (₹) Date Particulars Amount (₹)
Dec. 31, to balance c/d 16,20,000 Dec. 31, By bank account (18,00,000 × 16,20,000
2018 2016 90%)
Total 16,20,000 Total 16,20,000
Dec. 31, To balance c/d 54,00,000 Jan. 1, By balance b/d 16,20,000
2017 2017
Dec. 31, By bank account (42,00,000 × 37,80,000
2017 90%)
Total 54,00,000 Total 54,00,000
Jan. 1, To contract account (contract 80,00,000 Jan. 1, By balance b/d 54,00,000
2018 price) 2018
Dec. 31, By bank account (balancing 26,00,000
2018 figure)
Total 80,00,000 Total 80,00,000

WORK-IN-PROGRESS ACCOUNT FOR THE YEAR ENDING DECEMBER 31, 2016, 2017 and 2018
Date Particulars Amount (₹) Date Particulars Amount (₹)
Dec. 31, To contract account 18,80,000 Dec. 31, By balance c/d 18,80,000
2016 2016
Total 18,80,000 Total 18,80,000
Jan. 1, To balance b/d 18,80,000 Jan. 1, By contract account (reversing 18,80,000
2017 2017 journal)
Dec. 31, To contract account 60,90,000 Dec. 31, by contract account (reserve) 7,36,000
2017 2017
Dec. 31, By balance c/d 53,54,000
2017
Total 79,70,000 Total 79,70,000
Jan. 1, To balance b/d 53,54,000 Jan. 1, By contract account (reversing 53,54,000
2018 2018 journal)
Total 53,54,000 Total 53,54,000

Illustration 20
ABC Company Limited has undertaken a contract for ₹2,00,000 on April 1, 2017. Prepare a contract account and the balance
sheet in T format from the trial balance and the adjustments given below—

P a g e | 37
 TRIAL BALANCE AS ON MARCH 31, 2018

Particulars Amount (Dr.) ₹ Amount (Cr.) ₹

Share capital 40,000
Cash received on contract (80% of work certified) 1,00,000
Plant and tools 12,200
Material sent to site 44,250
Labor charges 56,180
Land and building 25,000
Sundry creditors 4,380
General expenses 4,650
Cash in hand 2,100
Total 1,44,380 1,44,380
Material retuned to store is ₹2,125. Of the plant and tools sent to site, plant worth ₹1,300 was lost due to carelessness of the
staff. The value of the plant and tools as on March 31, 2018 was ₹8,000. Reserve 1/3 rd of the profits. The work completed
but not certified is ₹6,145. Assume that this was the only contract in hand during 2017-18.

Solution
CONTRACT ACCOUNT FOR THE YEAR ENDING DECEMBER 31, 2016
Particulars Amount (₹) Particulars Amount (₹)
To materials 44,250 By work in progress:
To plant and tools 12,200 Work certified (₹1,00,000 × 100) 1,25,000
80
To labor charges 56,180 Work uncertified 6,145 1,31,145
To general charges 4,650 By profit and loss account (plant lost) 1,300
To notional profit c/d 25,290 By materials returned to store 2,125
By plant and tools at site 8,000
Total 1,42,570 Total 1,42,570
To work-in-progress account (25,290 × 3 )
1 8,430 By notional profit b/d 25,290

To profit and loss account (balance) 16,860

Total 25,290 Total 25,290
The amount of notional profit which is to be transferred to the work-in-progress (reserve) can also be calculated as follows—
1 𝐶𝑎𝑠ℎ 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 1 1,00,000
𝑊𝑜𝑟𝑘 − 𝑖𝑛 − 𝑝𝑟𝑜𝑔𝑟𝑒𝑠𝑠 (𝑟𝑒𝑠𝑒𝑟𝑣𝑒) = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 × × ⇒ 25,290 × × ⇒ ₹6,744
3 𝑊𝑜𝑟𝑘 𝑐𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 3 1,25,000
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝑙𝑜𝑠𝑠 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 = ₹25,290 − ₹6,744 = ₹18,546.
BALANCE SHEET AS ON DECEMBER 31, 2018
Liabilities Amount (₹) Assets Amount (₹)
Share capital 40,000 Cash in hand
Profit and loss account 16,860 15,560 Land and building
Less: Plant lost -1,300
Sundry creditors 4,380 Plant and tools
Material at store
Work in progress (1,25,000+6,145-8,430)
1,22,715
Less: Cash received 1,00,000 22,175
Total 59,940 Total 59,940

Illustration 21
Surya Construction Limited started its business with a paid-up capital of ₹50 lacs. On April 1, 2017, it undertook a contact
of a building for ₹60 lacs. Cash received on account of the contract up to March 31, 2018 was ₹18 lacs (being 90% of work
certified). Work uncertified as on March 31, 2018 was estimated at ₹1,00,000. As on March 31, 2018, the cost of materials
at site was ₹30,000 and outstanding wages were ₹5,000. Of the plant and machinery charged to the contract, machinery
costing ₹2,00,000 was returned to stores on March 31, 2018. Plant and machinery charged to the contract is to be
depreciated at 5%. The following were the ledger balances (Dr.) as per the trial balance as on March 31, 2018—

₹
Land and building 23,00,000
Plant and machinery (60% at site) 25,00,000
P a g e | 38
 Furniture 60,000
Materials 14,00,000
Fuel and power 1,25,000
Site expenses 5,000
Office expenses 12,000
Rates and taxes 15,000
Cash at bank 1,33,000
Wages 2,50,000
Prepare a contract account and balance sheet for the year ending on March 31, 2018.

Solution
CONTRACT ACCOUNT FOR THE YEAR ENDING ON MARCH 31, 2018
IN THE BOOKS OF SURYA CONSTRUCTION LIMITED
Particulars Amount (₹) Particulars Amount (₹)
To materials 14,00,000 By work in progress:
To plant and machinery sent to site 15,00,000 100
Work certified (₹18𝐿 × ) 20,00,000
90
To wages (₹2,50,000+₹5,000 o/s) 2,55,000 Work uncertified 1,00,000 21,00,000
To fuel and power 1,25,000 By plant returned to store 1,90,000
To site expenses 5,000 By plant at site 12,35,000
To office expenses 12,000 By material at site 30,000
To rates and taxes 15,000
To notional profit c/d 2,43,000
Total 35,55,000 Total 35,55,000
1
To profit and loss account (2,43,000 × 3 × 72,900 By notional profit b/d 2,43,000
90
)
100
To work-in-progress 1,70,100
Total 2,43,000 Total 2,43,000

BALANCE SHEET OF SURYA CONSTRUCTION LIMITED AS ON DECEMBER 31, 2018

Liabilities Amount (₹) Assets Amount (₹)
Share capital 50,00,000 Cash in hand 1,33,000
Profit and loss account 72,900 Furniture 60,000
Outstanding wages 5,000 Land and building 23,00,000
Plant and machinery in store (10,00,000 + 11,90,000
1,90,000)
Machinery at site (13,00,000 − 65,000) 12,35,000
Material at site 30,000
Work-in-progress (20,00,000 + 1,00,000 −
1,70,100)
19,29,900
Less: Cash received -18,00,000 1,29,900
Total 50,77,900 Total 50,77,900

P a g e | 39
Day - 5

P a g e | 40
Illustration 22 (Illustration Number 8.6 of Maheshwari Mittal)
Utkal Construction Limited took a contract in 2012 for road construction. The contract price was ₹10,00,000 and it is
estimated that the cost of completion would be ₹9,20,000. At the end of 2012, the company has received ₹3,60,000
representing 90% of work certified. Work not yet certified was ₹10,000.
Expenditure incurred on the contract during 2012 was as follows—
Materials ₹50,000; Labour ₹3,00,000; Plant ₹20,000.
Materials costing ₹5,000 were damaged and had to be disposed-off for ₹1,000. Plant is considered as having depreciated by
25%.
Prepare Contract Account for the year ending 2012 in the books of Utkal Construction Limited. Also show all possible figures
that can reasonably be credited to Profit and Loss Account in respect of the contract.

Solution
Contract Account
For the year ending 31 st December 2012
Particulars Amount (₹) Particulars Amount (₹)
To materials 50,000 By material sold (disposed-off) 1,000
To labour 3,00,000 By P & L a/c (loss on damage of material) 4,000
By plant at site:
Cost ₹20,000
To plant 20,000 Less: Dep. @ 25% (₹5,000) 15,000
By work in progress:
Work certified ₹4,00,000
(Note – 1)
To notional profit c/d 60,000 Work not certified ₹10,000 4,10,000
Total 4,30,000 Total 4,30,000
To P & L account (Note – 2) 28,800 By notional profit b/d 60,000
To work in progress a/c (Bal. figure)
(Note – 4) 31,200
Total 60,000 Total 60,000
𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 3,60,000
Note – 1: 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑 = 90
× 100 = 90
× 100 = ₹4,00,000
Note – 2: Percentage of the work certified to the contract price is 40% i.e. Work Certified / Contract Price  100 =
₹4,00,000/10,00,000100. Because the value of work certified is equal to or more than ¼th of the contract price but less
than ½ of the contract price so profit (which is to be transferred to the P & L a/c) shall be calculated using the following
formula:
1 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
But in this question estimated cost is given though the work certified is equal to or more than ¼th of the contract price and
less than ½ of the contract price, so profit shall be estimated and the appropriate formula shall be used to calculate the
amount which is to be transferred to the profit and loss account (click here to see the rule).
𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑 3,60,000
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 × = 80,000 × = ₹28,800
𝐶𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑃𝑟𝑖𝑐𝑒 10,00,000
Note – 3: Estimated Profit = Contract Price – Estimated Cost
= ₹10,00,000 – ₹9,20,000 (already given in the question)
= ₹80,000
Note – 4: Amount which is to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹60,000 – ₹28,800 = ₹31,200

Illustration 23 (Illustration Number 8.8 of Maheshwari Mittal)

IT IS STRONGLY RECOMMENDED TO STUDENTS TO GO THROUGH THE ESCALATION CLAUSE AT LEAST 4-5 TIMES
ALONG WITH THE WORKING NOTE–1. THE CORRECT CALCULATION OF THE INCREASE IN THE CONTRACT PRICE
AND UNDERSTANDING OF THE SOLUTION LIES IN FACT THAT YOU READ THE STATEMENT AND NOTE–1
THOROUGHLY.

Deluxe Limited undertook a contract for ₹5,00,000 on 1st July, 2006. On 30 th June 2007 when the accounts were closed, the
following details about the contract were gathered—
₹
Material purchased 1,00,000

P a g e | 41
 Wages paid 45,000
General expenses 10,000
Plant purchased 50,000
Materials in hand on 30.06.2007 25,000
Wages accrued/outstanding on 30.06.2007 5,000
Work certified 2,00,000
Cash received 1,50,000
Work not certified 15,000
Depreciation on plant 5,000
The above contract contained an escalation clause which reads as follows—
“In the event of price of materials and rates of wages increase by more than 5%, the contract price will increase
accordingly by 25% of the rise in the cost of materials and wages beyond 5% in each case.”
It was found that since the date of signing the agreement, the prices of materials and wage rates increased by 25%. The value
of work certified does not take into account the effect of the above clause.
Prepare the contract account. Your workings should form part of the answer.

Click here to see, what is a contract subject to escalation or de-escalation clause?

Click here to see rules, when the escalation clause is applicable.
Click here to see rules, when the de-escalation clause is applicable.

Solution
Contract Account
For the year ending 30 th June 2007
Particulars Amount (₹) Particulars Amount (₹)
By work in progress:
Work certified ₹2,00,000
To materials 1,00,000 Work not certified ₹15,000 2,15,000
To wages ₹45,000
Add: Outstanding ₹5,000 50,000 By material in hand 25,000
By plant at site:
Cost ₹50,000
To general expenses 10,000 Less: Dep. (given) (₹5,000) 45,000
By contractee account (increase in
contract price) (Note – 1) (Click to see
To plant 50,000 the final calculation) 5,000
To notional profit c/d 80,000
Total 2,90,000 Total 2,90,000
To P & L a/c (Note – 2) 60,000 By notional profit b/d 80,000
To work in progress a/c (reserve) (Note
– 3) 20,000
Total 80,000 Total 80,000
Note – 1: Increase in the contract price due to the escalation clause:
Material and wages are subject to escalation clause. So, these two costs are:
Material cost is ₹75,000 i.e. ₹1,00,000 – ₹25,000 (Material in hand)
Wages cost is ₹50,000 i.e. ₹45,000 + ₹5,000 (Outstanding)
From the perusal of the escalation clause and the second last paragraph of the statement following points emerge (READ
CAREFULLY):
1. Only material and wages costs are subject to escalation clause.
2. The escalation clause is applicable only in the event of price of materials and rates of wages increase by more than
5%.
3. In the event of price of materials and rates of wages does not increase by more than 5% then the escalation clause
is not applicable.
4. Further, in the event of price of materials and rates of wages increase by more than 5% i.e. in the event escalation
clause is applicable—then the contract price will increase accordingly by 25% of the rise in the cost of materials
and wages beyond 5% in each case.
5. Since the date of signing the agreement, the prices of material and wage rates have increased by 25%. So as per the
escalation clause the contract price will increase by 25% of the rise in the cost of materials and wages beyond 5%
in each case. Because the increase in cost of material and wage rates is 25% and beyond 5% it is 20% (i.e. over 5%
it is 20%) so the contract price will increase by 25% of 20% increase.
P a g e | 42
 6. If the cost of material and wage rate were 100% at the time of signing the agreement then today these are 125%
(i.e. 100% + 25% increase).
Materials
Effect of increase in price of materials
Total increase Increase up to 5% Increase beyond 5% i.e. 20%
₹75,000  25 / 125 = ₹15,000 ₹75,000  5 / 125 = ₹3,000 ₹75,000  20 / 125 = ₹12,000

Wages
Effect of increase in price of materials
Total increase Increase up to 5% Increase beyond 5% i.e. 20%
₹50,000  25 / 125 = ₹10,000 ₹50,000  5 / 125 = ₹2,000 ₹50,000  20 / 125 = ₹8,000

Combined i.e. Material + Wages

Effect of increase in price of materials and wages
Total increase Increase up to 5% Increase beyond 5% i.e. 20%
₹1,25,000  25 / 125 = ₹25,000 ₹1,25,000  5 / 125 = ₹5,000 ₹1,25,000  20 / 125 = ₹20,000
₹15,000 + ₹10,000 = ₹25,000 ₹3,000 + ₹2,000 = ₹5,000 ₹12,000 + ₹8,000 = ₹20,000

Increase in contract price (Contract price will increase by 25% of increase in cost of materials and wages beyond
5% in each case) = ₹20,000  25 /100 = ₹5,000
Note – 2: Percentage of the work certified to the contract price is 40% i.e. ₹2,00,000 / ₹5,00,000  100. Because the value of
work certified is equal to or more than ¼th of the contract price and less than ½ of the contract price so profit (which is to
be transferred to the P & L a/c) shall be calculated using the following formula:
1 𝐶𝑎𝑠ℎ 𝑅𝑒𝑐𝑒𝑖𝑣𝑒𝑑
𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑛𝑑 𝐿𝑜𝑠𝑠 𝐴𝑐𝑐𝑜𝑢𝑛𝑡 = 𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 × ×
3 𝑊𝑜𝑟𝑘 𝐶𝑒𝑟𝑡𝑖𝑓𝑖𝑒𝑑
1 ₹1,50,000
= ₹80,000 × × = ₹20,000
3 ₹2,00,000
Note – 3: Amount which is to be transferred to the work in progress account:
= Notional Profit – Amount transferred to the P & L a/c
= ₹80,0000 – ₹20,000 = ₹60,000

Illustration 24
Following are the expenses incurred after the certification of the work: Wages ₹6,000; Other expenses ₹3,500 and Materials
₹8,500. Calculate the work not certified.

Solution
Any expense(s) incurred after the certification of the work will form part of the work not certified as for these expenses the
certificate has not been given by the certifier/engineer/evaluator.

Cost of the work uncertified in this question will be ₹18,000 and has been calculated as follows:
Wages ₹6,000
Other expenses ₹3,500
Materials ₹8,500
TOTAL ₹18,000

Illustration 25
Wages ₹6,00,000
Materials ₹3,00,000
Overheads ₹1,20,000
5% of the value of the materials issued and 6% of wages may be taken to have been incurred for the portion of work
completed but not yet certified. Overheads are charged as a percentage of direct wages. Calculate the value of work not
certified.

Solution
Any expense(s) incurred after the certification of the work will form part of the work not certified as for these expenses the
certificate has not been given by the certifier/engineer/evaluator.

Cost of the work uncertified in this question will be ₹58,200 and calculated as follows:
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Materials (5% of material i.e. ₹3,00,000  5 / 100) ₹15,000
Wages (6% of wages i.e. ₹6,00,000  6 / 100) ₹36,000
Overheads (20% of wages i.e. ₹36,000  20 / 100) ₹7,200
TOTAL ₹58,200

𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 ₹1,20,000
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠 𝑡𝑜 𝑤𝑎𝑔𝑒𝑠 = × 100 = × 100 = 20%
𝑊𝑎𝑔𝑒𝑠 ₹6,00,000

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