What portion of profit on uncompleted contracts is transferred to the profit and loss account?

Answer 1

Profit and Loss Accounts are necessary accounting tools for any business, small or large. They are used to account for all financial gains and losses over a specific fiscal year. When a contract's provisions do not coincide with your business' fiscal year, you must decide how to account for contract profits. The most convenient solution is to simply calculate the profit during the fiscal year for which you are drawing up the Profit and Loss Account.

Profit and loss accounts

· Businesses use profit and loss accounts to track revenues, gains, expenses and losses during a specific fiscal year. In short, the statement helps a company's officers know whether they were profitable or not for the prior fiscal year. Because the statement is broken down into categories, officers can identify areas of needed improvement. Profit and Loss Categories· The statements are generally have two distinct categories: "Revenues and Gains" and "Expenses and Losses." The "Revenues and Gains" category includes revenues from "primary activities," revenue/income from "secondary activities," and gains (for example, on the sale of assets or gains from lawsuits). The "Expenses and Losses" category includes expenses from primary and secondary activities and all losses (on the sale of assets and lawsuits). An example of a "primary" activity is the buying and selling of merchandise, while a "secondary" activity is the rent from unused space

Uncompleted Contracts

· Whether you are engaged in a primary or secondary activity, your company likely signs contracts for the services of a third party, or otherwise to legally bind the party to engage in some action. For example, you may contract with vendors to have them sell your products on your behalf. Because the fiscal year may end before the term of a contract does, you may have profits on that contract that you want to account for in your Profit and Loss Statement. Accounting for Uncompleted Contract ProfitThe day that a fiscal year ends a new one begins. The terms of a contract may or may not coincide. Therefore, to account for profits in a given fiscal year, you merely need to add up all of the profit earned on a contract from the start of the current fiscal year to the last day in the current fiscal year. Because it is a profit, it will fall under the broad category of "Revenues and Gains." However, you must decide whether the profit on the contract is from your businesses "primary," or "secondary" activities, or whether it is a gain from the sale of long-term assets or a lawsuit. This tells you where to account for the profit in the overall Profit and Loss statement

Profit on incomplete contracts: At the end of an accounting period it may be found that certain contract have been completed while others are still in process and will be completed in the coming years. The total profits made on completed contract say be safely taken to the credit of the profit and loss account. But the same cannot be done in case of incomplete contracts. These contracts are still in process, and there are possibilities of profits being turned into to losses on account of heavy rise in prices of materials and labor and losses on account of other unforeseen contingencies. At the same time it does not also seem desire able to consider the profits only on completed contracts and ignore completely incomplete ones because this may result in heavy fluctuations in the figure of profit from year to year. A year in which a large number of contracts have been completed will show an abnormal high figure for profit while reserve may be the case in the year in which a large number of contracts remain incomplete. Therefore, profits on incomplete contracts should be considered, of course, after providing adequate sums for meeting unknown contingencies