How is the revenue recognized in accounting for construction companies? What are the daily entries applied to financial operations in contracting accounting?
Through this article, we will know how the revenues and expenses of any contracting contract are recognized and how they are recorded as daily entries in the integrated contracting company accounting system.
Let's start from the point that we, as a contracting company, entered into a tender, won it, and actually contracted with the client and the contract data as this:
Contract value: 1,000,000 EGP
Estimated costs: 800,000 pounds
Contract period: two years
Before we start with the accounting treatment in contracting accounting and its application in the contracting company accounting and management program, we must know that after the tender is drawn to the company, we must begin coding the projects with ours and describing them on the system
Let us start from the point that we, as a contracting company, entered into a tender, won it, and actually contracted with the client and the contract data as this:
Coding means coding projects by giving each company’s project a specific number that is distinct to it, and project description means writing a detailed description of the project items (the work that you will do in the project) and many accountants prefer coding the items as well, and the project description is based on the terms of reference that you bought from the client
This is a picture of the projects screen in the contracting accounting program Accflex:
This is also a very important report that shows a quick detailed presentation of the projects entered into with details of each item in the Accflex contracting accounts program
Stages of revenue recognition in accounting for contracting companies?
The first stage: receiving the down payment
At the stage in which we start, we take an advance payment from our client or the owner of the project in order to start carrying out our work, and this advance payment will be a commitment on us to the extent that we prove a certain entitlement to the owner.
The down payment is recorded
100,000 cash / of cash bank
100000 to account / clients of contracts under construction (client)
(Recording of proof of collection of an advance payment from the client, owner of the project
Of course, through the Accflex system, the collection process is recorded through the treasury, banks, and system automatic program.
Mostly the advance payment is collected through checks, so we have devoted an entire article explaining the checks cycle in detail and you can enter the article. You read the article from here... Checks cycle essay
Whether the receipt is in cash or by checks, the receipt is a proof of record, and the form of the receipt is
The second stage is the actual implementation phase
From the stages of the contracting accounting cycle and its application to the contracting company accounting program and in the actual implementation phase. Here we begin to operate and incur actual costs. Before we start recording these costs, we must know that as accountants we incur two types of costs:
The first type: direct costs
The direct costs that we spend on projects that we live in and some countries include items from them, and for which we must know the proper accounting guidance for these cost items within the framework of accounting for contracting companies:
1- The materials and raw materials used directly in the project, such as bricks, cement, sand, and it is possible to buy these materials directly from suppliers and distribute them to projects, or I buy and store them, and after that I distribute them to projects, so we have dedicated an article about how to build an integrated storage system.
2- The salary of the workers who are employed on the projects that I am the owner of this country, for which we have devoted an article entitled Recording of wages and salaries.
3- We appreciate adding to the two items the costs of renting the machines used in the projects, the expenses and expenses of engineering designs and other costs directly related to the project.
The second type: indirect costs
This is the indirect costs, such as management wages and administrative expenses, and period costs that are borne on the income statement in the year they are incurred, and as a contracting company accounting system, not as part of the project costs
How do I record the costs that I bear in accounting for contracting companies?
In principle, in order to say that our accounting directive is sound, we must have an account in the chart of accounts in the assets in circulation called contracts in progress (under construction) and this account in which all the costs incurred on the projects are confirmed so that we can know where we got in our projects and what they cost in each Project exactly from each of the different cost items..
Let us assume that we are costing us materials in the amount of 2,000,000 pounds, wages in the amount of 100,000 pounds, and direct expenses (uniforms of designs) of 100,000 pounds.
In this case, our registration will be confirmed in this way:
400,000 account / contracts under construction (client project ...)
200,000 LE materials and supplies
100,000 LE wages and salaries
100,000 Direc Cost and designs
To those mentioned
200,000 / raw materials (or suppliers account)
100,000 account / wages owed to the workers.
100,000 account / other credit accounts.
A picture of movement exchange raw materials from the warehouses and linking it to different cost centers (projects) from the warehouse management program.
The third stage: General revenue calculation
It is the recognition of the revenue that pertains to the year, and this is the most important stage of all, in which I declare the value of my income and my costs value.
At the beginning the income for the year is calculated according to the rate of achievement, and the rate of achievement is calculated by this simple equation.
Achievement percentage = actual costs ÷ total estimated costs until contract completion
In the first year, the achievement percentage will be in this way: 400,000 actual total spent 800,000 totals estimated = 50%
And then the revenue that pertains to the year will be like this: 1,000,000 total contract value 50% Completion rate = 500,000.
After that we determine the approval entry. With revenues and contract costs in accounting for contracting companies, which we will decide on in the income statement in this way:
400000 EGP from account / costs of contracts in progress
100000 of account / contracts in progress (in difference)
50000 to the account / revenue of contracts in progress.
(A record of proof of the period of revenue and cost of the projects)
The fourth stage is proof of claims extracts)
It is the proof of claims (extracts) that we require from the customer in order to get a part of the amount and we have devoted a full detailed article about the owners' extracts.
It is possible, of course, that the value of this claim or the extract is greater or less than the percentage of completion, and let us assumes that it is 600,000 c. We will prove it with this entry
600,000 account / clients for contracts under construction (client ...)
600,000 EGP to the account / requirements of clients under construction. (Extracts No. ...)
( Proof of extract entry No. ..)
Extract form in the contracting accounting program
And the collection constraint is of course known and easy for people as a result of the entries of the second year. Let us assume that it is the same costs, and in this case we will establish the same entries in all stages and we will provide a fifth stage
The fifth stage is to close the project and extract the contract account
Close the project and thus I have terminated my project and handed it a final delivery and closed the contracts in progress account with the contract claims contracts in progress account with this entry
1,000,000 claims account for contracts under construction
1,000,000 to the contracts under construction account
(Proof of closing the project at the end of the second year)
You can learn about the best accounting programs in Egypt and the Middle East through the Accflex system
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