Contract Account SS3 Financial Accounting Lesson Note

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

1. Define contract account
2. Mention and explain some terminologies in the contract accoun

CONTRACT ACCOUNT

This is a system of cost accounting used by contractors engaged in construction and building works where it is common for a firm to be engaged in the execution of many separate contracts at the same time and which can continue over a long period (many years).

Features of contract

1. the cost that is direct and is large
2. it is site-based
3. it is undertaken to customer’s special requirement
4. it is of relatively long duration
5. there is a low indirect cost

Reasons for a contract account

1. To find the profit of each contract
2. To ascertain the level of contract execution
3. To take care of such businesses whose nature of work does not conform to a financial year’s calculation of profit. 

Construction contract

A construction contract can be defined as the execution of building and civil engineering projects, mechanical and electrical engineering installations and other fabrications usually evidenced by an agreement between two or more parties (i.e. contractor and customer).

Types of construction contract

1. Short-term construction contract
2. Long-term construction contract

Short-term construction contract: This refers to a contract which is expected to be started and completed within an accounting period.

Long-term contract: it is a contract entered into for the manufacture or building of a single substantial entity or the provision of a service where the time taken to manufacture, build or provide is such that a substantial proportion of all such contract work will extend for a period exceeding one year.

Terminologies:

1. Revenue recognition: This is the process of accounting for revenue in the financial statements when it has been earned.
2. Contract work in progress: This is the accumulated certifiable cost relating to the contract that is yet to be completed.
3. Mobilisation fees: This is the amount advanced by the employer to a contractor to enable construction work to start.
4. Contract certification: This is a process by which the project’s architect or engineer issues a certificate to evidence the value of work done on a construction contract as at a particular date.
5. Retention monies: There is frequently a contract clause that entitles the customer to withhold payment of a proportion of the contract value (10%) for a specified period after the end of the contract.

EVALUATION:    

1. Define contract account

1. Mention and explain some terminologies in the contract account

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively