CONTRACT ACCOUNTING

Contract accounting may be defined as, "the systematic recording of the work done under each
contract for a third party in consideration who agrees to pay a fixed sum of money at the
completion of full work or part payment after the work is completed partially and is being
certified/approved by the architect or surveyor"
Some firms such as builders, construction contractors, civil engineering firms, construction
and mechanical engineering firms are engaged in construction works such as construction of
buildings, bridges, roads and so on. A firm engaged in the construction works requires to know
the total cost of the construction work done. The total costs of the work help to find out the
profit earned from these works. The cost information about construction works helps to monitor
and evaluate the performance of contract work and to determine the total contract cost. Such
information is provided by a costing method known as contract costing.
Contract costing is the costing method applied to determine the cost of construction work
performed as per a customer's specification. Contract costing is also called terminal costing as it
terminates with the discharge of contract work. The construction work is undertaken at the site
allotted by the client. The contract sites vary and are always outside the premises belonging to
the clients. A separate code number is allotted to each site where a number of contract works are
undertaken. A contract account is maintained for each contract work to record the contract costs
under contract costing. Maintaining a contract account helps to find out the amount of profit
earned during a particular period since financial books do not report it separately. Normally, a
contract account is prepared at every year-end to determine the profit for the specified period.