ACCOUNTING FOR INVENTORIES AND INVENTORIES

1 INTRODUCTION
Inventories constitute a substantial item for both income statement and balance sheet. Inventories
are vital for the business derives its existence from selling or converting stocks into either sales of
goods or services. Inventories are also subject to variations over time and it is difficult to determine
their value.
The value of inventories may differ from the actual carrying cost on account of changing fair values
or exchange rates fluctuations. Computation of the cost of inventories requires computation of
relevant costs and an agreed stock valuation method to be applied. The values of inventories
represent deferred cost to or from accounting period prior or after the current accounting period.

A construction contract is a contract specifically negotiated for the construction of an asset or a

combination of assets that are closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use.

This lesson deals with the topics of accounting for stock and accounting for contracts as per IAS 2
“Inventories” and IAS 11 that lays down the principles and procedures for accounting for inventory
and construction contracts respectively. The terms ‘stock’ and ‘inventory’ are interchangeable.

2 LEARNING OBJECTIVES
After completing this lesson you will be able to:
1. determine relevant cost of stock for financial reporting purposes;
2. value and account for stock in accordance with accounting standards;
3. disclose all elements of stock in accordance with accounting standards;
4. compute annual turnover, cost of sales and profit or loss on a contract;
5. record all amounts relating to contracts via journal entries and accounts;
6. calculate and record any balance sheet totals arising on contracts;
7. disclose contract balances in accordance with accounting standards

3 INVETORIES
The value of inventories and its accounting principles has impacts on both the performance and
financial position. The income for the year depends very much on amount of stocks at start and end
of each period. The cost of inventory not sold at the end each year is deferred to the following year
and therefore reducing the cost of sales and at the same time increasing the assets the company
may recover from the following year’s sales.
Journal entries
Closing Stock

Dr Inventories (B/S) xxxx

CR Cost of Sales (P&L) xxxx
To record transfer of inventories to inventories asset from cost of sales expense

Opening Stock
Dr Cost of Sales (P&L) xxxx
Cr Inventories (B/S) xxxx
To record transfer of inventories from inventories asset to cost of sales expense

3.1 Definitions
Inventories are assets:
a) held for sale in the ordinary course of business;
b) in the process of production for such sale; or
c) In the form of materials or supplies to be consumed in the production process or in the
rendering of services.

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Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction.

Net realisable value refers to the net amount that an entity expects to realise from the sale of
inventory in the ordinary course of business. Fair value reflects the amount for which the same
inventory could be exchanged between knowledgeable and willing buyers and sellers in the
marketplace. The former is an entity-specific value; the latter is not. Net realisable value for
inventories may not equal fair value less costs to sell.

3.2 STOCK VALUATION

Para 9 of IAS 2:- “Inventories should be measured at the lower of cost and net realisable
value”.
Net realisable value is the net amount that an entity expects to realize from the sale of inventory in
the ordinary course of business.
Fair value reflects the amount for which the same inventory could be exchanged between
knowledgeable and willing buyers and sellers in the marketplace. The former is an entity-specific
value; the latter is not. Net realisable value for inventories may not equal fair value less costs to
sell.

Inventories includes
a) Goods purchased and held for resale;
b) finished goods produced, or work in progress being produced or raw materials;
c) In the case of a service provider, the costs of the service for which the entity has
not yet recognised the related revenue (para 19)
The value of inventories is determined on line to line basis.

Eexercise 1: Lucky Store stocks values as June 31, 2007 was as under:

Ite Cost Realisable Selling

m value costs
A 4,500 4,600 300
C 6,800 7,300 400
D 9,300 10,500 1,100
E 5,600 5,500 100
F 4,300 4,700 400
Tot 30,50 32,600 2,300
al 0

Units unsold at the end of the year

Ite A B C D E
m
Unit 50,00 25,00 20,00 56,00 45,00
s 0 0 0 0 0

Required
Compute the value of closing stock

The value of inventory may have increased between acquisition of stocks and its valuation. The
company may not recognize such an increase for it is not prudent to realize the increase in value as

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it may not necessarily accrue to the company and that the company still control the stocks.

Where future revenues will not cover the level of costs already incurred, any excess should be
immediately written off to the profit and loss account in the current year. This might occur where
stock is obsolete, where there is a change in economic circumstances, or where the stock has
physically deteriorated.
3.3 COST OF INVENTORIES AND COSTS OF PURCHASE (Paras 10 & 11)

The cost of inventories shall comprise

a) Costs of purchase;
b) Costs of conversion;
c) Other costs incurred in bringing the inventories to their present location and condition.

The costs of purchase of inventories comprise the purchase price, import duties and other taxes
(other than those subsequently recoverable by the entity from the taxing authorities), and
transport, handling and other costs directly attributable to the acquisition of finished goods,
materials and services. Trade discounts, rebates and other similar items are deducted in
determining the costs of purchase.

In Tanzania taxes that may apply on purchase of stocks, local or imported, are import duty, excise
duty and value added tax. In some cases VAT may be chargeable or not and may as be recoverable
or not depending on the use in which the stock is put and the tax status of company owning such
stocks. Other costs include inspection and port charges.

Exercise 2: Micro Trader imported 10,000 tones of raw incurred the following costs

Item of expenditure Cost

(000)
Cost 4,600
Insurance and Freight 600
Imported Duty 1,000
Excise Duty 600
Value Added Tax 1,360
Port and clearing charges 180
Portion administration 1,800
overheads

VAT is recoverable from the output tax charged on sales to customers. Port and clearing charges is
gross of VAT which is also recoverable. Micro Trader benefits from a 5% trade discount on cost and
that is has not deducted from the invoice price. Micro Trader exports of its products and eligible to
50% of both duty draw back of import duty and excise duty on raw materials utilized in production
of exported goods exported. Micro Trader also enjoys a 2% cash discount by settling the invoices
within prescribed periods. By the year end only 70% of purchased raw materials were consumed

Compute the unit cost of inventories of raw materials.

3.4 COST OF CONVERSION (paras 12 and 13)

The costs of conversion of inventories include directly costs and indirect costs in form of overheads.
Overheads refer to systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods. Fixed production overheads are those indirect

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costs of production that remain relatively constant regardless of the volume of production, such as
depreciation and maintenance of factory buildings and equipment, and the cost of factory
management and administration. Variable production overheads are those indirect costs of
production that vary directly, or nearly directly, with the volume of production, such as indirect
materials and indirect labour.

Fixed production overheads are based only on the normal capacity of the production facilities.
Normal capacity is the production expected to be achieved on average over a number of periods. If
production is below normal, fixed production overhead per unit should not be increased as a result
of the low production or idle plant. The same principle does not apply to abnormally high levels of
production. Stock is never valued above the actual cost incurred.
Exercise 3
A company has variable production costs of 5,000 per unit and total fixed production costs of
20,000,000. The normal capacity of the business is 250,000 units.

During the year to 31 December 2005 actual production was 200,000 units of which 13,750 were in
closing stock.

Required:
1) Calculate the cost of closing stock
a) Assuming production was 280,000 units;
b) Assuming production was 200,000 units
2) In any case determine how much of stock cost should be charged to income statement.

3.5 Cost of joint products and by-products (paragraph 14)

When the costs of conversion of each product are not separately identifiable, they are allocated
between the products on a rational and consistent basis. The allocation may be based the relative
sales value of each product either
a) At the stage in the production process when the products become separately identifiable;
or
b) At the completion of production.

The net realizable value of by-product is deducted from the cost of the main product.

3.6 Other costs (paras 15-18)

Other costs should only be included if they are incurred in bringing the stock to its current
location and condition. Examples are
a) Share of costs of personnel and payroll functions or central computing services;
b) Design costs related to a specific item of stock, etc.
c) Interest on borrowings under IAS 23 as interest may be capitalised on a qualifying asset.

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale (IAS 23 para 4). Most stocks do not take a substantial period. An exception is
maturing whisky which takes several years to get to a sellable condition.

3.7 Cost inventories of a service provider (paragraph 19)

To value of stocks of service providers have inventories is the cost of production of such
services. These costs consist of the labour and other costs of personnel directly engaged in
providing the service, including supervisory personnel, and attributable overheads. Labour
and other costs relating to sales and general administrative personnel are not included but
are recognised as expenses in the period in which they are incurred. The cost of inventories
of a service provider does not include profit margins or non-attributable overheads that are

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 often factored into prices charged by service providers.1

4 COST FORMULAS

The cost of inventories, other than those dealt with in paragraph 23, shall be assigned by using the
first-in, first-out (FIFO) or weighted average cost formula. An entity shall use the same cost formula
for all inventories having a similar nature and use to the entity. For inventories with a different
nature or use, different cost formulas may be justified.

The Standard does not permit the use of the last-in, first-out (LIFO) formula to measure the cost of
inventories.

5 RECOGNTION AS AN EXPENSE (Paras 34 and 35)

When inventories are sold, the carrying amount of those inventories shall be recognised as an
expense in the period in which the related revenue is recognised. The amount of any write-down of
inventories to net realisable value and all losses of inventories shall be recognised as an expense in
the period the write-down or loss occurs. The amount of any reversal of any write-down of
inventories, arising from an increase in net realisable value, shall be recognised as a reduction in
the amount of inventories recognised as an expense in the period in which the reversal occurs.

Some inventories may be allocated to other asset accounts, for example, inventory used as a
component of self-constructed property, plant or equipment. Inventories allocated to another asset
in this way are recognised as an expense during the useful life of that asset.

6 DISCLOSURES (Para 36)

The financial statements shall disclose:
(a)The accounting policies adopted in measuring inventories, including the cost formula used;
(b)The total carrying amount of inventories and the carrying amount in classifications appropriate;
(c)The carrying amount of inventories carried at fair value less costs to sell;
(d)The amount of inventories recognised as an expense during the period;
(e)The amount of any write-down of inventories recognised as an expense in the period in
accordance with paragraph 34;
(f)The amount of any reversal of any write-down that is recognised as a reduction in the amount of
inventories recognised as expense in the period in accordance with paragraph 34;
(g)The circumstances or events that led to the reversal of a write-down of inventories in accordance
with paragraph 34; and
(h) The carrying amount of inventories pledged as security for liabilities.

Para 37: Information about the carrying amounts held in different classifications of inventories and
the extent of the changes in these assets is useful to financial statement users. Common
classifications of inventories are merchandise, production supplies, materials, work in progress and
finished goods. The inventories of a service provider may be described as work in progress.

Para 38: The amount of inventories recognised as an expense during the period, which is often
referred to as cost of sales, consists of those costs previously included in the measurement of
inventory that has now been sold and unallocated production overheads and abnormal amounts of
production costs of inventories. The circumstances of the entity may also warrant the inclusion of
other amounts, such as distribution costs.
Some entities adopt a format for profit or loss that results in amounts being disclosed other than
the cost of inventories recognised as an expense during the period. Under this format, an entity
presents an analysis of expenses using a classification based on the nature of expenses. In this
case, the entity discloses the costs recognised as an expense for raw materials and consumables,

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labour costs and other costs together with the amount of the net change in inventories for the
period.2

7 CONSTRUCTION CONTRACTS – INTRODUCTION

Some construction contracts cover a period more than one accounting period. The concepts of
prudence and realisation say that we should not recognise income or profit until it has been
realised. Profit emanating contracts is recognized in accordance with principles set in IAS 11:
Construction Contracts.

IAS 11 defines profit or loss recognition principles for different scenarios surrounding construction
contracts, namely
a) Profitable contracts;
b) Contracts whose profit may not measured with certainty; and
c) Loss making contracts.

Alternative method of accounting for such contracts is a trade-off between the accruals/matching
principle and the prudence/realisation concepts when accounting for construction contracts and
often have to exercise professional judgement and expertise in determining what amounts should
be reported in the accounts.

7.1 Definitions
IAS 11 (paragraph 3) defines a construction contract as “a contract specifically negotiated for the
construction of an asset or a combination of assets that are closely interrelated or interdependent
in terms of their design, technology and function or their ultimate purpose or use”.

Examples of a single asset would be a bridge, tunnel, building or ship, oil refineries, power plants,
chemical works, etc. Although the examples in the standard are building/civil engineering based a
contract to develop software would also be covered by the IAS. Contracts for services are covered
by IAS 18 ‘Revenue’ (covered in module 1).

The standard identifies two types of contracts (para 3):

• fixed price the contractor agrees to a fixed contract price, or a rate per unit of output, which
may be subject to cost escalation claims (e.g. allowing for inflation)
• Cost plus contract the contractor is reimbursed for allowable costs, plus a percentage of these
costs or a fixed fee.

A contract may extend to more than one year but this is not an essential feature.
The contractor will not wish to bear the full cost of financing the project and the contract agreement
will require that the customer will be invoiced for work done as the contract progresses. These
amounts are referred to as “Progress billings”. These amounts will normally be invoiced during the
contract after work has been done and may be net of retentions. Retentions are usually a
percentage of the amount billed (often 5% but sometimes considerably higher) that under the
terms of the contract, the customer does not pay until the contract is completed.

As these billings (sometimes called progress payments) are not for the completed project they are
not credited directly to sales or turnover, as would happen with a completed sale, but are recorded
for each invoice raised as:

Dr Debtors

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 Cr Contract account

When cash is received from the customer it is recorded in the normal way i.e.:
Dr Bank
Cr Debtors
Businesses should keep a separate ‘contract account’ for each construction contract in progress.
Progress billings can be thought of as potential sales or turnover to be recognised. Progress billings
invoiced, however, are not necessarily the same as turnover. In order to keep a record and control
of costs it is usual to keep a separate record for each contract. Typical costs are wages and
salaries, materials, hire of equipment, depreciation charges, sub-contractors’ charges and
allocation of overheads.

The ‘contract account’ is essentially a holding account in the balance sheet to which all invoices
relating to the contract are posted during the year. At the year-end, relevant amounts are
transferred out to the profit and loss account.
Construction contracts include contracts for rendering services which are directly related to the
contract e.g. architectural, engineering, etc. and contracts for demolition or restoration of assets,
and restoration of environments. (Para 5).

7.2 CONTRACT REVENUE

Contract revenue (para 11) is made up of:

a) The initial amount of revenue agreed in the contract; and
a) Variations in contract work, claims and incentive payments:
i) to the extent that it is probable that they will result in revenue; and
ii) they are capable of being reliably measured.

A variation (para 13) is an instruction from the customer for a change in the scope of work e.g.
change in design. This may result in an increase or decrease in revenue. Variations should be
included as part of total revenue when it is probable that the customers will approve both the
variation and the monetary value.

A claim (para 14) occurs when the contractor seeks recompense from the customer for costs not
included in the contract price arising from, for example, delays caused by the customer or errors in
specification. Because of their contentious nature claims are only included as part of revenue when
negotiations have reached an advanced stage such that it is probable that the customer will accept
the claim.

Incentive payments (para 15) are additional amounts paid to the contractor if specified
performance standards are met or exceeded e.g. early completion. These should be included only
when the contract is sufficiently advanced that it is probable that the specified standard will be met
and that the amount of the incentive payment can be measured reliably.
Possible penalties through failure to meet performance standards should also be considered and
included if they can be measured reliably. Note that penalties are viewed as a reduction in
turnover and not as additional costs. Penalties should be deducted from revenue when it is
probable they will be incurred.

7.3 Contract costs (para 16) include:

a) Costs that directly relate to the contract;

b) Costs that are attributable to contract activity in general and can be allocated to the
contract; and
c) Other costs specifically chargeable to the customer under the terms of the contract.

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Permissible costs follow the same rules as in IAS 2.

The following costs are excluded (para 20) and may be charged directly to income statement of
respective accounting period
a) General administration;
b) Selling costs;
c) Research and development; and
d) Depreciation of idle plant and equipment that is not used on a particular contract.
The accumulation of contract costs normally starts when the contract begins. However, costs
incurred in securing a contract are also included if they can be separately identified and measured
reliably and it is probable that the contract will be obtained (para 21).
When costs of securing a contract have been written-off to the profit and loss account this
treatment cannot be reversed in a subsequent period when the contract is secured i.e. once
written-off the costs stay written-off.

7.4 PROFIT AND LOSS ACCOUNT (para 22 – 37)

Remember that each contract must be assessed individually.

STEP 1 – calculate whether the contract will make an overall profit or loss. This will indicate
whether the contract is estimated to make a profit or a loss.
Profitable contracts are then split into one of two categories
e) Contract whose income can be estimate reliably and
f) Contract whose income cannot be estimated reliably
Summary
Contract Income measurement Income recognition
Profitable para Outcome can be Stage of completion of the contract
22 measured reliably
Profitable para Outcome cannot be Revenue and costs, but no profit,
32 measured reliably recognised
Loss para 36 Full amount of the expected loss recognised immediately

Example 6

Mega Builders Ltd (MBL) has 3 contracts in progress at 30 June 2007, A, B and C.
All contracts commenced during the year. The following information is available:

Contract A B C

Total contract value 8,00 5,00 4,00

0 0 0
Costs incurred to date 5,60 360 3,30
0 0
Estimated further costs to 1,40 4,14 2,20
complete 0 0 0
% of completion 80% 8% 60%

Due to the nature of the contracts MBL can usually reliably estimate the outcome when the
contract is 40% complete. All costs are considered recoverable.

Required:

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 Calculate the turnover and cost of sales to be included in the profit and loss account of MBL for
the year to 31 December 2005.

Solution

STEP 1 – total estimated profit or loss for each contract

Contract A B C
Contract value 8,00 5,00 4,500
0 0
Contract cost to 5,60 360 3,500
0
date
Cost to completion 1,40 4,14 2,500
0 0
Estimated profit/ 1,00 500 (2,000
0 )
(loss)

A and B are profitable and C is loss making contracts. A is profitable and its outcome can be
estimated reliably. B is also profitable but the outcome cannot be estimated reliably.

STEP 2 – calculate turnover

(a) For profitable contracts where outcome can be estimated reliably and loss making
contracts:
Turnover = estimated total revenue x stage of completion
The stage of completion is often expressed as a percentage and may be based on (para 30):
• Proportion of costs incurred to total estimated contract cost (for this purpose cost incurred
relates to cost of work performed and excludes costs that relate to future activity and prepaid
expenses);
• Surveys of work performed; or
• Completion of a physical proportion of the contact work

(b) For profitable contract where outcome cannot be estimated reliably:

As the outcome cannot be estimated reliably, no profit is recognised. Turnover is restricted to the
extent of contract costs incurred that it is probable will be recoverable.
In both (a) and (b) the turnover figure must be entered into the accounts. This is done by:

Dr Contract account
Cr P/L – turnover
Being revenue recognised for the year

Calculate the turnover for each contract for the year to 30 June 2007.
The turnover for each contract is as follows:
Contract A – profitable and reliable estimate
% completion x total contract value = 80% x 8,000,000=6,400,000

Dr Contract account 6,400,000

Cr P&L – turnover 6,400,000

Contract costs = 5,600,000

Dr P & L Turnover 5,600,000

Cr Contract Account 5,600,000

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 Contract B – profitable but no reliable estimate
Turnover restricted to costs incurred that it is probable will be receivable = 360,000.

Dr Contract account 360,000

Cr P/L – turnover 360,000

Contract costs =360,000

Dr P&L Cost of Sales 360,000

Cr Contract Account 360,000

Contract C – loss making

% completion x total contract value = 58% x 4,500,000 = 2,610,000

Dr Contract account 2,610,000

Cr P/L – turnover 2,610,000

Note that the loss=3,500,000 - 2,610,000=890,000

Dr P & L Cost of Sales 3,500,000

Cr Contract Account 3,500,000
Two journals could be done after all the calculations have been completed. This would be:

Dr Contract account 9,370,000

Cr P/L – turnover 9,370,000

Dr P& L Cost of Sales 9,460,000

Cr Contract Account 9,460,000

STEP 3 – calculate costs of sales

(a) Profitable contract where outcome can be estimated reliably
Cost of sales = total estimated costs x stage of completion
(b) Profitable contract where outcome cannot be estimated reliably
Costs incurred are written-off to the profit and loss account.

Contract costs that are not probable of being recovered are recognised as an expense immediately.
No revenue is recognised in respect of these items.

(c) Loss making contract

The expected loss should be provided for immediately irrespective of:

(i) Whether or not work has started on the contract;

(ii) The stage of completion of the contract; or
(iii) The amount of profits expected to arise on other contracts.

For all three, cost of sales is recorded by:

Dr P/L cost of sales

Cr Contract account

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 8 BALANCE SHEET
8.1

STEP 4 – calculate the resultant balance sheet amounts.

At the year end, there may be two balances left relating to construction contracts:-
• Trade debtors (i.e. progress billings invoiced – progress billings received)
• The balance on the ‘contract account’.

If the balance on the ‘contract a/c’ is a debit i.e. an asset, it is presented as ‘Gross Amount Due
from Customers’ under current assets (para 42). If the balance is a credit, it is presented as ‘Gross
Amount due to Customers’ (para 42) (a current liability).

The ‘Gross Amount Due to/from customers’ comprises (paras 43 & 44):-

Costs incurred (customer owes us for costs incurred on their behalf) X

Recognised profit/ (loss) (we charge the customer a mark up or we cannot recoup all costs) X/(X)
Less: progress billings invoiced ( to bill the customer, it reduces what they owe us)
(X)
Gross Amount Due from/to customer X

If the balance is a debit (‘Gross Amounts Due from Customers’), the customer still owes us for costs
incurred and/or work completed but not invoiced. – it is therefore an asset.
If the amount is a credit (‘Gross Amounts Due to Customers’), we have invoiced the customer too
much and owe them money back and/or we are unable to recover all costs incurred– it is therefore
a liability.

Example 6
In order to work out the balance sheet we need to have additional information.

Contract A B C
Contract value 8,00 5,00 4,50
0 0 0
Contract cost to date 5,60 360 3,50
0 0
Cost to completion 1,40 4,14 2,50
0 0 0
Progress billing 6,00 400 3,80
0 0
invoiced
Progress billing 5,10 - 3,50
0 0
received
% completion 80% 8% 60%

Required:
Calculate the amounts to appear in the balance sheet of MBL as at 31 June 2007 and prepare
extracts from the profit and loss account and balance sheet of MBL for the year to 31 December
2005.

Solution
Contract A B C
Progress billing invoiced 6,000 400 3,800
Progress billings received 5,100 - 3,500
Trade Debtors 900 400 300
Costs incurred 5,600 360 3,500
Profit/(Loss) recognized 800 - (890)

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 Progress billings invoiced (6,000 (400 (3,800
) ) )
Amount due from/ 400 (40) (1,190
)
(customers)

MBL Profit and loss account (extract) Year to 30 June 2007

Turnover 9,370,000
Cost of sales 9,460,000
Gross Profit/ (loss) (90,000)

Balance sheet (extract)

As at 31 December 2005

Current assets
Trade receivables 1,600,000
Gross amounts due to customers 400,000

Current liabilities
Gross amount due to customer (1,230)

Note: the amount due to customers on contract B and C have been added together. This is the
correct presentation.

Never net off amounts due from/ (to) to give a single amount.

Reliable estimates
One issue we have not covered is how we decide whether an estimate is reliable or not. The
standard gives the following guidance.
The outcome can be estimated reliably (para 23) when:
(a) Total contract revenue can be assessed reliably;
(b) It is probable that the economic benefits will flow to the company (i.e. the customer will pay);
(c) Both contract costs to complete and stage of completion can be measured reliably; and
(d) Contract costs can be clearly identified and measured reliably.
For a contract in its early stages or where these are significant risks remaining (e.g. on a contract using
new technology or techniques) it will probably not be possible to meet criterion (c) above and the
overall outcome cannot be estimated reliably. Such a contract will fall into the profitable not reliable
category.

Exercise 7
A contractor entered into a contract in 2004 which is due to be completed by 2006. Relevant
information is:
Monetary values in millions
Year 2004 2005 2006
Contract 15,00 15,00 15,00
price 0 0 0
Variation - 200 400
Penalty - - (100)
% 35% 80% 100%
completion

Variations and the penalty can be assumed to be measured reliably at each relevant balance sheet
date. Assume that the contract is profitable overall and the outcome can be estimated reliably at

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each balance sheet date.

Required: Calculate turnover to be recognised in 2004 to 2006.

Solution
Item Year 2004 2005 2006
Contract revenue 15,00 15,00 15,000
0 0
Variation - 200 400
Penalty - - (100)
Total contract revenue 15,00 15,20 15,300
0 0
% Completion 35% 80% 100%
Total revenue to be 5,250 12,16 15,300
0
recognized
Less: recognized - (5,250 (12,160
) )
previously
To be recognized in the 5,250 6,910 3,140
year

9 DISCLOSURE
The principal disclosures (para 39 and 40) are as follows:
(a) contract turnover for the year;
(b) methods used to determine turnover (usually stage of completion);
(c) methods used to determine the stage of completion;
(d) aggregate amount of costs incurred and recognised profits (less recognised losses) to date;
(e) the amount of advances received (if any);
(f) The amount of retentions (if any).

Advances received are amounts received by the contractor before the related work is performed
(para 41). Retentions are amounts of progress billings which are not paid until the satisfaction of
conditions specified in the contract for the payment of such amounts or until defects have been
rectified (para 41).

Remember that gross amounts due from/ (to) customers should be shown on the balance sheet as
assets/liabilities.

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