Contract Accounting Journal Entries

Contract accounting involves recognizing revenue and expenses related to long-term contracts. The process typically includes recording initial contract costs, progress billings, revenue recognition, and adjustments for costs and billings over time. Here are key journal entries involved in contract accounting:

Scenario: Construction Contract

Assume a construction company enters into a contract to build a building for ₹1,000,000. The project is expected to take two years to complete. Here are the journal entries for various stages of the contract:

1. Initial Contract Costs Incurred

Particulars	Debit (₹)	Credit (₹)
Construction in Progress (CIP) A/c	200,000
To Cash/Bank A/c		200,000
(Being initial contract costs incurred)

2. Progress Billings to Customer

Particulars	Debit (₹)	Credit (₹)
Accounts Receivable A/c	250,000
To Billings on CIP A/c		250,000
(Being progress billings to customer)

3. Collections from Customer

Particulars	Debit (₹)	Credit (₹)
Cash/Bank A/c	250,000
To Accounts Receivable A/c		250,000
(Being collections received from customer)

4. Revenue Recognition (Percentage of Completion Method)

Assume the project is 20% complete at the end of the first year. Revenue recognized is 20% of ₹1,000,000 = ₹200,000.

Particulars	Debit (₹)	Credit (₹)
Construction Expenses A/c	200,000
To Construction in Progress (CIP) A/c		200,000
(Being costs allocated to recognized revenue)

Particulars	Debit (₹)	Credit (₹)
Construction in Progress (CIP) A/c	200,000
To Construction Revenue A/c		200,000
(Being revenue recognized for percentage of completion)

5. Adjusting Entries for Costs and Billings

If additional costs are incurred or additional billings are made, adjusting entries would be recorded. Assume additional costs of ₹50,000 are incurred and additional billings of ₹60,000 are made.

Additional Costs Incurred:

Particulars	Debit (₹)	Credit (₹)
Construction in Progress (CIP) A/c	50,000
To Cash/Bank A/c		50,000
(Being additional contract costs incurred)

Additional Billings:

Particulars	Debit (₹)	Credit (₹)
Accounts Receivable A/c	60,000
To Billings on CIP A/c		60,000
(Being additional progress billings to customer)

6. Completion of Contract

Assume the project is completed in the second year, and the remaining revenue and costs are recognized.

Final Costs Incurred:

Particulars	Debit (₹)	Credit (₹)
Construction in Progress (CIP) A/c	750,000
To Cash/Bank A/c		750,000
(Being remaining contract costs incurred)

Final Billings to Customer:

Particulars	Debit (₹)	Credit (₹)
Accounts Receivable A/c	750,000
To Billings on CIP A/c		750,000
(Being final progress billings to customer)

Revenue Recognition (Completion of Contract):

Particulars	Debit (₹)	Credit (₹)
Construction Expenses A/c	750,000
To Construction in Progress (CIP) A/c		750,000
(Being costs allocated to recognized revenue)

Particulars	Debit (₹)	Credit (₹)
Construction in Progress (CIP) A/c	750,000
To Construction Revenue A/c		750,000
(Being revenue recognized upon contract completion)

Summary of Entries

1. Initial Contract Costs:

   • Debit Construction in Progress (CIP) A/c
   • Credit Cash/Bank A/c

2. Progress Billings:

   • Debit Accounts Receivable A/c
   • Credit Billings on CIP A/c

3. Collections:

   • Debit Cash/Bank A/c
   • Credit Accounts Receivable A/c

4. Revenue Recognition:

   • Debit Construction Expenses A/c
   • Credit Construction in Progress (CIP) A/c
   • Debit Construction in Progress (CIP) A/c
   • Credit Construction Revenue A/c

5. Adjusting Entries for Additional Costs and Billings:

   • Debit Construction in Progress (CIP) A/c
   • Credit Cash/Bank A/c
   • Debit Accounts Receivable A/c
   • Credit Billings on CIP A/c

6. Completion of Contract:

   • Debit Construction in Progress (CIP) A/c
   • Credit Cash/Bank A/c
   • Debit Accounts Receivable A/c
   • Credit Billings on CIP A/c
   • Debit Construction Expenses A/c
   • Credit Construction in Progress (CIP) A/c
   • Debit Construction in Progress (CIP) A/c
   • Credit Construction Revenue A/c