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.
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 –
|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