Construction Contracts

By Construction Contracts, we mean the contract to build or develop the asset or combination of the assets closely related. As a matter of fact, construction takes more than one accounting period to complete,  which causes various problems for the accountant such as:

  • how much cost should be charged to each accounting period,
  • how much revenue should be recognized in each accounting period,
  • how much profit should be recognized in each accounting period.

On a routine basis, we recognize revenue when it is realized but in construction contracts, this is not the story as the revenue can only be realized at the end of the construction contract. 

Here we take the support of matching principle of accounting as the base and recognize an appropriate portion of the revenue and earning/ profits in each accounting period in order to ensure that the financial statements present a true and fair view.

Accounting Treatment

IAS 11 provides the complete guide to the treatment of construction contracts. According to the said standard, revenue and cost should be recognized into different accounting periods on the basis of stage of completion of the construction contract. The responsibility of assessing the stage of completion lies over the shoulder of the professional surveyor.

Journal Entries

Description Debit Credit
To record cash sale    
     
Bank    
   Revenue    
     
To record credit sale    
     
Accounts receivable    
   Revenue    
     
To record payment     
     
Bank    
   Accounts receivable    
     
To record related cost with revenue    
     
Cost of sales    
   Inventories/ Stock