Question

How will you treat profit on incomplete contract in cost accounts?

Answer 1

In contract accounts there would be no difficulty in dealing with profits if the contracts were completed in the course of the financial year. Then the profit would be credited to the Profit and Loss Account. But difficulty arises when we have to deal with profits arising on contracts which are not complete at the end of the year. We cannot afford to credit the entire profit shown to the Profit and Loss Account.

There is the possibility that next year due to rise in prices or wages or due to fines, there may be a loss. A provision has to be kept against such a contingency. Nor is it desirable that profit on a contract should be taken into account only when the contract is complete. In that case, the year in which the contract is completed, will show an abnormally high figure for profit.