by Problems on Contract Account and Contractee’s Account involve recording the costs, revenue, payments, and adjustments relating to a contract. These problems may cover one year, two years, or three years and may include a Trial Balance or Balance Sheet. Students are required to calculate profit or loss, work certified, retention money, and amounts due from the contractee. Proper journal entries help record transactions systematically and form the basis for preparing the final accounts.
Important Accounting Entries
| Transaction | Journal Entry |
|---|---|
| Materials purchased | Purchases A/c Dr. To Cash/Bank/Creditors A/c |
| Materials issued to contract | Contract A/c Dr. To Materials A/c |
| Wages paid | Contract A/c Dr. To Cash/Bank A/c |
| Direct expenses paid | Contract A/c Dr. To Cash/Bank A/c |
| Plant purchased | Plant A/c Dr. To Cash/Bank A/c |
| Plant used on contract | Contract A/c Dr. To Plant A/c |
| Overheads charged | Contract A/c Dr. To Overheads A/c |
| Work certified | Contractee A/c Dr. To Contract A/c |
| Cash received from contractee | Cash/Bank A/c Dr. To Contractee A/c |
| Retention money | Included as balance due from contractee |
| Profit on completed contract | Contract A/c Dr. To Profit & Loss A/c |
| Loss on completed contract | Profit & Loss A/c Dr. To Contract A/c |
| Materials remaining at site | Materials at Site A/c Dr. To Contract A/c |
| Plant returned after contract | Plant A/c Dr. To Contract A/c |
| Outstanding expenses | Contract A/c Dr. To Outstanding Expenses A/c |
| Prepaid expenses | Prepaid Expenses A/c Dr. To Contract A/c |
Basic Formulae
Profit = Contract Price − Total Contract Cost
Cost of Work Certified = Total Contract Cost − Cost of Work Uncertified
Retention Money = Work Certified − Cash Received
Amount Due from Contractee = Work Certified − Cash Received
Cost per Unit = Total Contract Cost ÷ Units Produced
Q1: Preparation of Contract Account and Contractee’s Account
A contractor undertook a contract for ₹5,00,000. During the year, the following expenses were incurred:
| Particulars | Amount (₹) |
|---|---|
| Materials purchased | 1,50,000 |
| Wages paid | 1,20,000 |
| Direct expenses | 30,000 |
| Plant purchased | 1,00,000 |
| Overheads | 40,000 |
At the end of the year, materials worth ₹10,000 remained at site and the plant was valued at ₹80,000. Work certified was ₹4,50,000 and the contractee paid 90% of the work certified.
Solution
Contract Account
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Materials | 1,40,000 | By Materials at Site | 10,000 |
| To Wages | 1,20,000 | By Plant at Site | 80,000 |
| To Direct Expenses | 30,000 | By Work Certified | 4,50,000 |
| To Plant Depreciation | 20,000 | ||
| To Overheads | 40,000 | ||
| To Profit transferred to P&L | 1,90,000 | ||
| Total | 5,40,000 | Total | 5,40,000 |
Profit = ₹4,50,000 + ₹10,000 + ₹80,000 − ₹1,40,000 − ₹1,20,000 − ₹30,000 − ₹20,000 − ₹40,000
Profit = ₹1,90,000
Contractee’s Account
Cash received = 90% × ₹4,50,000 = ₹4,05,000
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Contract A/c | 4,50,000 | By Cash/Bank A/c | 4,05,000 |
| By Balance c/d | 45,000 | ||
| Total | 4,50,000 | Total | 4,50,000 |
Retention Money = ₹4,50,000 − ₹4,05,000 = ₹45,000
Important Entries
| Transaction | Journal Entry |
|---|---|
| Materials used | Contract A/c Dr. ₹1,40,000
To Materials A/c ₹1,40,000 |
| Wages paid | Contract A/c Dr. ₹1,20,000
To Cash/Bank A/c ₹1,20,000 |
| Plant depreciation | Contract A/c Dr. ₹20,000
To Plant A/c ₹20,000 |
| Work certified | Contractee A/c Dr. ₹4,50,000
To Contract A/c ₹4,50,000 |
| Cash received | Cash/Bank A/c Dr. ₹4,05,000
To Contractee A/c ₹4,05,000 |
| Profit transferred | Contract A/c Dr. ₹1,90,000
To Profit & Loss A/c ₹1,90,000 |
