Here are some notes on contract profit and accounting entries in detail:
Contract Profit
Contract profit is the profit that is earned on a specific contract. Contract profit is calculated by subtracting the cost of the contract from the revenue earned on the contract.
Accounting Entries
The accounting entries for contract profit depend on the method of accounting that is used. In the completed contract method, the profit is recognized when the contract is complete. In the percentage-of-completion method, the profit is recognized as the contract progresses.
Completed Contract Method
In the completed contract method, the profit is recognized when the contract is complete. The following accounting entries are made when the contract is complete:
- Debit: Contract receivable
- Credit: Revenue
- Debit: Cost of goods sold
- Credit: Inventory
- Debit: Profit
Percentage-of-Completion Method
In the percentage-of-completion method, the profit is recognized as the contract progresses. The percentage of completion is calculated by dividing the costs incurred on the contract by the estimated total costs of the contract. The following accounting entries are made when the contract is complete:
- Debit: Contract receivable
- Credit: Revenue
- Debit: Cost of goods sold
- Credit: Inventory
- Debit: Percentage-of-completion profit
Conclusion
Contract profit is the profit that is earned on a specific contract. Contract profit is calculated by subtracting the cost of the contract from the revenue earned on the contract. The accounting entries for contract profit depend on the method of accounting that is used.