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Accounting of Construction Contracts

Today in this blog we will share the accounting of Construction Contracts, how the builders and developers will maintain their books of accounts, what are the Accounting standard applicable to the Builders and developers and also how the revenue will be recognised as per the AS.

Different Transaction in Real Estate –

there are two type of transaction first builder will sale the plot and second builder will develop the land and sale to the buyers. For sale of land AS 18 will be applicable and revenue will be recognised like goods and in Construction contracts it will be recognised as per AS 11.

Sale of plot of land–

It will be covered in AS-18 , Sale of plot of land without any development will be covered in AS 18 . as per AS 18 Sale will be booked when risk and reward will be transferred to the buyers.

Construction Contracts

If a builder will develop any land and than pass on to the buyers than  A builder will be considered as Contractor and revenue will be considered as per Accounting standard 11, if seller sale a portion to the buyer but the construction of the project in incomplete and seller will complete the construction on behalf of buyers.

As per AS 11 for revenue recognition  Percentage of Completion Method will be used.

Applicability  of Percentage of Completion Method

If the below four condition are satisfied than it will apply –

The duration of such projects is more than 12 months and it will cover under two accounting period

Project will be related to  construction  contracts like land development, structural engineering, architectural design, construction, etc.

While Contract is for individual units of the project  to be delivered to different buyers these are interrelated to completion of a number of common activities/ amenities

The construction or development activities form a significant proportion of the project activity.

Condition for  Recognition of Revenue

All the four Condition must be satisfied for the Recognition of Revenue Percentage of Completion Method

Agreement should be registered

More than 25% area should be sold out of Total area.

Out of 25% Flat sold value received should be more than 10%.(Received in bank)

Work Completion should be more than 25%. (this will include only construction cost , cost of land will not include for recognition of revenue)

Sale Recognition for the Builders and Developers

First find out how much percentage the project is complete

Percentage of Completion Method      = COST INCURRED TO DATE*

Sale will be the = Consideration received of agreement registered * % of completion.

Cost incurred to date* – This will include the cost of land , material etc. 

Closing Stock for the Builders and Developers –

Closing Stock
                Cost incurred to date – Stock Consumed

Stock Consumed will be  – 

Cost incurred to date                   * Flat Registered
Total no of flat

To check the example you can download the PDF 


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