How to Prepare a Contract Account in Cost Accounting

Understand Contract Account and Cost Elements

Key rules to remember

Cost of contract to date

Total debits − (materials returned, sold and at site + plant at site value)

If plant is shown as depreciation only, there is no plant credit. Do not deduct plant twice.

Wages for the year

Wages paid + outstanding at end − outstanding at start (prepaid: the reverse)

Apply the same accrual logic to other expenses.

Plant depreciation (straight line)

Cost × rate % × months at site ÷ 12

Use cost, or cost less scrap value, as the question says. Use the written-down value method only if stated.

Plant written-down value at site

Cost of plant − depreciation to date

This is the credit in the contract account when plant is debited at cost.

Loss or gain on materials sold

Cost of materials − sale proceeds

Credit the cost of materials, and debit the loss (or credit the gain) to the contract account.

Value of work done

Work certified + work uncertified (at cost)

Credit side of the contract account.

Notional profit

Value of work done + credits (returns, closing stock, plant value) − total debits

Equals value of work done − cost of contract to date.

How to solve Contract Account and Cost Elements questions

1. 1Read the question and note the contract price, start date, year end and what you are asked to find (the account, the notional profit, or the work-in-progress value).
2. 2List the debit items: materials (direct and from stores), wages with accruals or prepayments adjusted, direct expenses, sub-contract cost, plant, and any allowed overheads.
3. 3Adjust each item for accruals, prepayments and part-year timing. Work out plant depreciation for the months at site.
4. 4List the credit items: materials returned, materials sold at cost, closing materials at site, and plant at written-down value (if plant was debited at cost).
5. 5Post any loss or gain on materials sold or lost to the debit or credit side.
6. 6Add work certified and work uncertified on the credit side. Value uncertified work at cost, unless the question gives another value.
7. 7Total both sides. The difference is the notional profit or loss. Show it as the balancing figure and write the total of both sides equal.
8. 8Check: value of work done − net cost to date should give the same profit figure.

Quickest way: Net cost method

Common mistakes in Contract Account and Cost Elements

• Crediting plant at cost, or deducting both depreciation and plant value

  Students mix the two plant methods.

  Fix: Choose one. Either debit cost and credit WDV at site, or debit only depreciation. Never do both.

• Charging a full year's depreciation on plant that arrived mid-year

  The rate is given per year and students forget the time at site.

  Fix: Multiply by months at site ÷ 12. Write the working under the account.

• Ignoring outstanding or prepaid wages and expenses

  Students copy the 'paid' figure straight into the account.

  Fix: Add outstanding amounts and deduct prepaid ones before posting.

• Leaving out closing materials at site

  The item sits in a later line of the question.

  Fix: Tick off every item in the question. Closing materials always appear on the credit side.

• Loading head office overheads when the question does not allow it

  Students apply a habit from cost sheets.

  Fix: Charge general overheads only if the question gives an amount or a rate. Site overheads are always direct.

• Valuing uncertified work at contract price

  Students confuse it with certified work.

  Fix: Take uncertified work at cost unless told otherwise. Certified work is shown at the certified value.

Worked examples