SS3 First Term Financial Accounting Lesson Note – Contract Accounts

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WEEK 4                    

TOPIC: CONTRACT ACCOUNTS

CONTENTS:

• Definition of contract account
• Reasons for contract account
• Types of construction contract
• Methods of recognizing revenue under contract account
• Preparation of contract accounts

SUB-TOPIC 1:

Meaning of 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 execution of many separate contracts at the same time an which can continue over a long period of time (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 of long duration
5. there is low indirect cost

Reasons for contract account

1. To find the profit on 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

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