Contract Accounting - Contractee's Books

[Shunmas]

Hello !

Can someone please write what would be the journal entries in the books of contractee (Client - who is getting any work done) for:

Contract expenses and progress payments

Also what is the nature of contract account (for contractee) and is contract account closed in COST OF SALES account ?

Thank you very much

 

[David Griffiths]

Perhaps we should have a separate forum for homework questions?

 

[Shunmas]

@David Griffiths

Hello !

Well when I joined this forum, they said everyone here is a volunteer. There is no compulsion to answer any question posted onto this forum.

So I posted this question and yes its HOMEWORK. Homework in the sense of learning.

Thank you for your kind remarks.

 

[E Storey]

lol that's Griffiths told!

Well since it's homework, it would be unhelpful of us to simply tell us the answer, why don't you run through it logically here in this thread and we can tell you if you're on the right lines!

 

[Shunmas]

HI E Storey !

Thank you for your reply. Well I haven't found the answer in any book though. They always show journal entries from contractor's perspective. But after posting this thread, I searched it on google and found that:

Contract Account is by nature a Profit & Loss Account. Any Income (from contractor's view point) would be credited and any expenses (from contractee's view point) will be debited.

The J/E for progress payment would be: DR>>Contractor's Personal Account CR>>Cash Account

If this is right, can you please tell me how the contract account would be shown in Income Statement. Will it be shown in COST OF SALES?

Thank you

 

[Scalloway]

In the contractee's books the payments to the contractor will normally shown as fixed assets under construction, or work in progress if they are for resale on completion.

 

[Shunmas]

Thank you Scalloway.

Yes if I sell houses after getting them built from contractors, I would show them as WORK IN PROGRESS.

Now the question is:

1. Would they be classified as Current or Non Current Asset ?
2. Would the J/E be DR.>> Work in Progress Account CR.>>Contractee's Personal Account (Accounts Payable) and on payment, DR>Contractee's Personal Account CR>>Cash.

3. Has the contract account nothing to do with cost of sales ?

Many many thanks

 

[Scalloway]

1. Current Asset
2. JE's are correct
3. Cr Work in progress
Dr cost of sales
When the property is sold

 

[Shunmas]

Thank you for your reply.

I think the third entry would also include >> DR.CASH>>CR.SALES

So in a nutshell, we can summarise this through the following short scenario:

On 1 January 2011, ABC contracted XYZ to build a single housing unit for £100,000.
XYZ started the work. On 20 January, ABC paid £25,000 (progress payment).

The J/E would be: DR>>WORK-IN-PROGRESS ACCOUNT, CR>>CASH ACCOUNT £25,000

XYZ finished building the house on 30 January. ABC remitted the remaining amount.

The J/E would be: DR>>WORK-IN-PROGRESS ACCOUNT, CR>>CASH ACCOUNT £75,000

On 25 March, ABC sold the house for £150,000.

The J/E would be:
(first entry)

DR>>CASH ACCOUNT, CR>>SALES £150,000 -----------> (being the selling price)

(2nd entry)

DR>>COST OF SALES ACCOUNT, CR>>WORK-IN-PROGRESS £100,000----> (being the cost)

WHAT ABOUT ANY EXPENSES WE INCURRED RELATED TO THIS SPECIFIC CONTRACT, WILL WE CHARGE THE EXPENSES TO P&L or THIS SPECIFIC CONTRACT?

Thank you

 

[Scalloway]

Yes charge any direct expenses to the contract

 

[Shunmas]

Thanks Scalloway....

For example, for getting legal work done regarding building the unit on land, we incurred £500.

Would the J/E be:

DR> Contract Account (Legal Expenses)---£500
CR> Cash Account---£500

If this is the J/E, then would the category of this account (Contract account) be expense account (in an accounting software, peachtree for example) ?

Many Many Thanks

 

[Scalloway]

The basic JE is ok. I don't know your chart of accounts but in Sage I would have a Cost of Sales legal fees account and an Overheads legal fees account for general legal fees not part of a contract.