Entrance to Contracting accounting

Contracting accounting is one of the branches of accounting that is concerned with the accounts of contracting companies. The activity in contracting companies is divided into two parts:

section One

Employment for others, that is, the company’s construction and reconstruction for others, according to a contract concluded between the two parties

The second section

It is real estate investment where the partners build and commission the project or real estate and sell for their own account as well.

Contracting parties

1_ The customer is the owner of the building who needs a contracting company or contractor to build the property he needs.

2 _ The main contractor is the contracting company chosen by the client to start building the property and he is ultimately responsible for the delivery.

3 _ Subcontractor

Sometimes the main contractor may not have his workers to do some work, such as blacksmithing, plumbing, and others, so it harms to bring labor from outside the company for specific works, which are what are called subcontractors and it may be another contracting company.

4_ The consultant is responsible for receiving the project and verifying that it complies with the specifications and conditions agreed upon with the client. Financial payments are not received unless it is approved that they are in conformity with the specifications.

Tenders are raised and submitted by contracting companies, where a bid book is purchased that contains the specifications of the property or project to be built.

The tenderer's expenses are recorded and charged to administrative and general expenses

 From general and administrative expenses account

Bid Book A/c Dr – 100

To cash or bank A/c – 100

Then, the financial envelope for the prices for carrying out construction works is presented, and after that the technical envelope for the construction specifications that relates to the engineering department in the company. Then provide an initial letter of guarantee, which is an amount of money that the bank freezes from the company's account for the benefit of the customer because of seriousness of entering into tenders.

 The letter of guarantee shall be recordedBid for example

 initial letter of guarantee A/c Dr – 1000

To bank A/c – 1000

Upon the failure of the bid on the company, the expenses of the terms of reference are charged to the account of project costs or operations expenses, and it is an account that is opened for each project separately, where the project is charged with the revenues and expenses that are allocated to the endowment on the outcome of the project of profit or loss, i.e. it is considered an income list for a project only and is done after This is to create an income statement at the end of the year with total project revenues and total expenditures to find out the total activity of the facility.

  project costs  A/c Dr 

  To the tender of conditions account A/c 

Where is the limitation

But in practice, with the development of accounting software, a cost center is opened for each project, and the expense and revenue is charged directly to the project easily.

After that, the initial letter of guarantee is canceled and a final letter of guarantee is opened and it is opened to ensure the implementation of the project.

To cancel the initial letter of guarantee

 Bank A/c Dr – 100

To initial letter of guarantee A/c – 100

Opening a final letter of guarantee

From a final letter of guarantee

To the bank / bank

When the project is delivered and approved by the consultant that it conforms to the required specifications, the required documents are submitted to the bank to cancel the final letter of guarantee and recover the frozen money by the bank in exchange for the letter of guarantee to the company’s account again.

The limitation is:

From bank

To final letter of guarantee

When the main contractor starts the project, an amount is paid by the client to start working, and a letter of guarantee is made for an advance payment to the customer, where the bank freezes an amount from the company’s account against a letter of guarantee, an advance payment, and the amount of the advance payment is deducted and the letter of guarantee is canceled later with obtaining the revenues Or when making the abstract, and we will talk about it at length in the following topics.

The entry is for the down payment

From letter of guarantee advance payment

To the bank 

We will talk at length in the following topics about letters of guarantee, extracts and others. Follow us.