Consideration of profit on incomplete contracts

There are no hard and fast rules regarding calculation of the figures for profit to be taken to the credit side of Profit and Loss Account. However, the following rules may be followed:

a) Profit should be considered in respect of work certified only, work uncertified should always be valued at cost.

b) If the amount of work certified is less than ¼ of the contract price >>> NO PROFIT should be taken into consideration.

c) If work completed is ¼ or more, but less than ½ of the contract price, then 1/3 of the profit disclosed (as reduced by the percentage of cash received from the contractee) should be taken to the profit & loss a/c. The balance should be treated as a Reserve.

d) If work certified is ½ or more of the contract price, then 2/3 of the profit disclosed, as reduced by the percentage of cash received from the contractee, should be taken to the Profit & Loss a/c. The balance should be treated as Reserve. Profit transferred to P & L a/c

= Estimated profit x

e) In case the contract is very much near completion,

Profit to be taken to the credit of Profit & loss a/c

= Total estimated profit x x