Consider the following two contracts:
|
(1) |
(2) |
|
|
£ |
£ |
|
|
Cumulative turnover |
200 |
110 |
|
Cumulative actual costs |
250 |
200 |
|
Cumulative related costs |
250 |
110 |
|
Cumulative payments on account |
180 |
160 |
|
Losses to date (£250 – £200) |
50 |
– |
|
Expected future losses |
40 |
70 |
If we assume that this is the first year of each contract, the profit and loss account will include the following:
|
(1) |
(2) |
Total |
|
|
£ |
£ |
£ |
|
|
Turnover |
200 |
110 |
310 |
|
Related costs (cost of sales) |
290 |
180 |
470 |
|
Gross loss |
90 |
70 |
160 |
If the projects were in other than their first year, the amounts included would depend on what had been charged or credited in the previous years.
The various balance sheet figures are:
|
(1) |
(2) |
Total |
|
|
£ |
£ |
£ |
|
|
Stock – long term contract balances |
NIL |
NIL |
NIL |
|
Debtors – amounts recoverable on |
|||
|
contracts |
20(a) |
NIL |
20 |
|
Creditors – payments on account |
NIL |
30(b) |
30 |
|
Provision/accrual for foreseeable losses |
40 |
NIL |
40 |
Notes
(a) Cumulative turnover less cumulative payments on account, £200 – £180 = £20.
(b) For contract 2, actual costs exceed related costs so we start with a long term contract balance of £90, i.e. £200 – £110.
Expected future losses of £70 are set off against that balance, reducing it to £20. But, there are excess payments on account, £50 since payments on account, £160, exceed turnover, £110. This credit balance, £50, is set off against the debit, £20, representing the long term contract balance.
The net credit of £30 will appear in the balance sheet as a provision or accrual as appropriate.