Expected loss of construction contract

Question

one of our construction projects is expected to end with a loss. I understand that the expected loss should be recognised immediately in the current financial year. I am not sure about the double entries. The Cost of sales account should be debited. Should be the Accounts Receivable or Provision for loss being credited?

Answer 1

No. None of them to be credited/debited. You know your expected and also you know your costs so far incurred, which is already in your accounts. Then you can find the revenue as the balancing figure.

Eg. ($ 000)
Revenue      =   250 (Balancing figure)
Costs           =  (275) (already in cost of sales)
                         ----------
Loss             =    (25)
                         ----------
                        
Now you simply account for the revenue:
Contract debtors    Dr 250
   Contract revenue    Cr 250

Now the loss is automatically accounted for in your books.

Answer 2

In general, if the total estimated contract costs (burdened with Fringe and Overhead rates) exceed the contract value, the loss would need to be calculated and taken immediately. Below is an example entry for forward loss provisions:

Entry to Record:

Debit    Contract Costs   
Credit    Forward Loss Provision (Liability)

As the contract continues and the costs are incurred:

Debit    Forward Loss Provision until balance is zero
Credit    Contract Costs

Comments

As far as I know Cost is always a debit entry. Thus, how can I credit the contract cost?