Accounting for Construction Contracts

This video outlines how to account for fixed price construction contracts pursuant to AASB 111 Construction Contracts (please note that AASB 111 is equivalent to IAS 11 Construction Contracts).

Published 26/03/2014

[AceCPAsBookkeeping]

TLDR: Construction contracts accounting involves recognizing costs and revenues based on the stage of completion of the project, with revenue recognized to the extent of cost incurred and no profit recognized until the project is finished.

00:00 🏗 Accounting for construction contracts involves determining when to recognize revenues and expenses based on the stage of completion of the project.
01:20 🏗 Revenue and costs for fixed price contracts are recognized based on the stage of completion, which can be measured by the total cost to date divided by the estimated total cost.
02:30 💰 The contract price is $900, the estimated profit is $1 million, and 25% of the profit can be recognized in the first year, with the estimated total profit remaining at $1 million.
03:38 💰 Recognized profit for two years is $875, 000, calculated by recognizing $250, 000 in year one and $625, 000 in year two, instead of working out percentage completion for each year.
04:11 💡 Construction contracts accounting involves recognizing costs and revenues, with debits for construction in progress and credits for cash and construction revenue.
05:10 📊 Recognize revenue to the extent of cost incurred, and no profit is recognized until the project is finished.
06:02 💡 Construction revenue is limited to $2 million, costs may not be as budgeted, and anticipated losses are immediately recognized regardless of project completion percentage.
07:32 💰 Recognize revenue based on percentage complete if outcome is reliably determined, adjust for changes in costs, and recognize full loss immediately if expected.

[moazsaeed]

Thanks, its really I never grasped the concept before watching this video

[accountingthefuture]

Thank you so much, your explanation was so concise.

[MuhammedCPmuhammedba]

thank you sir, , , your explanation is logical and easily understandable

[salmanden]

there r different methods in practice, the method is ultimately depends on many factors like whether a private/public/govt/small /big scale company or project, .and treatment also depends on whether owners equity or bank finance or share holders.

[saudsaleh]

What is the difference between cost in excess of billing and billing in excess of cost in contract accounting?

[Seligs]

If you are calculating WIP on a monthly basis, will the invoiced out amount for a particular month have an effect on your WIP for the month?

[hilalahmed]

why is loss being credited and profit debited?

[vincentkoenpublica]

Hi, I was wondering on how do we record the contract price?

[antonizhong]

it might be weird, but is it possible the expected loss (Dr onerous liablitity) would be even bigger than the expense occured (Cr construction expense), like due to geographic inspection error? and how to balance the entry?