Format of Contract Account: Everything You Need to Know
Format of contract account refers to how the various expenses related to a given contract will be organized and accounted for.3 min read
Format of Contract Account Overview
Format of contract account refers to how the various expenses related to a given contract will be organized and accounted for. Contracts are usually undertaken as per a customer’s requirements, and so a unique account containing the details pertaining to each contract should be kept. These details will include the costs and profits associated with that account. As the tasks entailed by the contract are completed, costs associated with it will be tallied in the account to be added or not into the final cost of the contracted product or service, as is stipulated by the contract.
Contract Account Costs
Direct costs that may be detailed and debited in a contract account may include:
- Material costs
- Equipment costs
- Special services (such as expert’s fees)
Indirect costs that may be charged on an equitable basis to a contract account may include:
- Administrative and office expenses
- Storage expenses
- Repair expenses
The difference between the costs associated with an account and what is paid into that account will represent the net profit or net loss from a particular contracted project. Any profit considered yet to be earned from a contract is considered notional profit, since it has not yet been paid and is purely speculative. Costs, however, are never notional, since they must be paid at the time they are incurred.
Contract Account Terms
Some terms associated with contract accounting that may be useful to be familiar with include:
- Direct costs. These are costs incurred by an individual project, as listed in the above section. They will be the main expenses associated with a contract account.
- Indirect costs. These costs are more administrative in nature or are associated with doing business in general (maintaining an office, paying salaries, advertising, maintenance, etc.), and as such should represent a small portion of the costs associated with a contract.
- Cost control. This refers to the challenge and attempt to keep costs associated with projects as low as possible, thereby to maximize the profit on each project if the client will not be billed for the expenses, as well.
- Surplus material. This refers to any materials associated with the project that were not used for the project. These are normally disposed of or resold, if possible, as a means of maintaining cost control.
Contract Accounting Procedures
For each type of cost associated with a contract account, there are certain procedures, or best practices, associated with accounting for those costs. Examples of cost types and their associated procedures include:
- Material costs. These are costs associated with tangible materials purchased in order to see a contract through to the end. Material costs will be debited to the contract they are for, but if surplus material can be returned, the cost of it will be deducted from the associated account. If it cannot be returned, it will be considered wastage. If the contracting party supplies the materials for the account, then expenses for this will not be incurred.
- Labor costs. These are costs associated with paying individuals to take actions necessary to complete a contract. Such labor as they conduct will be considered direct labor and will be debited to the associated contract account. If there are a number of contracts for the labor, then a payroll will be prepared for each individual account. The costs associated with supervisory staff will be distributed to the accounts on an equitable basis.
- Overhead costs. Overhead includes power, lighting, maintenance, administrative costs, and any costs associated with maintaining the business, in general. Overhead is generally considered to be an indirect cost, and as such will be apportioned to all accounts equally, unless a particular account requires more overhead in some way to manage its completion.
- Sub-contract costs. Some contracts will require work associated with them to be farmed out to other contractors who are referred to as sub-contractors. Sub-contractors will be used when the work required is of a specialized nature that the main contractor does not have the skill to deal with. The costs associated with hiring sub-contractors will be charged directly to the associated contract account.
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