Treatment of Profit on Complete Contracts
by A Complete contract is a contract in which all the specified work has been fully performed according to the agreed terms and conditions. In contract costing, a contract is treated as complete when the entire project is finished, inspected, and accepted by the contractee. All costs such as materials, labour, plant, direct expenses, and overheads are accumulated during the contract period. After completion, the total contract cost is compared with the contract price to determine the final profit or loss. Complete contracts provide accurate information about the actual cost, financial performance, and final outcome of a project.
Treatment of Profit on Complete Contracts:
When a contract is fully completed, the actual profit or loss is determined by comparing the contract price with the total cost incurred. The profit on a complete contract is treated as fully earned because there is no remaining work or uncertainty regarding completion. The total profit is therefore transferred to the Profit and Loss Account. If the contract results in a loss, the entire loss is also transferred to the Profit and Loss Account. This treatment ensures that the financial statements recognise the complete profit or loss arising from the contract in the accounting period of completion.
Accounting Entries
| Particulars | Journal Entry |
|---|---|
| For recording profit on completed contract | Contract A/c Dr. To Profit and Loss A/c |
| For recording loss on completed contract | Profit and Loss A/c Dr. To Contract A/c |
| For transfer of contract account balance after completion | Contract A/c Dr. To Profit and Loss A/c (Profit) |
Profit on Complete Contract = Contract Price − Total Contract Cost
Treatment of Loss on Complete Contracts:
When a contract is fully completed and the total contract cost exceeds the contract price, the resulting loss is treated as a complete loss. Since the contract has been completed, there is no uncertainty regarding the final loss. Therefore, the entire loss is transferred to the Profit and Loss Account in the period in which the contract is completed. This treatment ensures that the actual loss arising from the completed contract is fully recognised. The loss is not carried forward because the contract has already been completed and all related costs have been determined.
Accounting Entry
| Particulars | Journal Entry |
|---|---|
| For Transfer of Loss on Completed contract | Profit and Loss A/c Dr. |
| To Contract A/c |
Loss on Complete Contract = Total Contract Cost − Contract Price