Contractor is engaged on a contract for a considerable time

When a contractor is engaged on a contract for a considerable time his financial resources could become severely strained. A large amount of working capital would be required if he did not received payment until the completion of the contract. It is a normal practice particularly in the case of large contracts for the contractee to pay the contractor sum of money on account during the period of the contract. These sums will be paid against certificates by surveyors or architects acting or the contractee certifying the value of work so far performed. In many cases, the terms of the contract provide that whole of the amount shown by the certificate shall not be paid immediately but percentage thereof shall be retained is called retention money. The object of this retention is to place the contractee in a favorable position, should faulty work arise or penalties become payable by reason of late completion of the contract. If the work has not been certified, the contractee would not make any advance on it. Such work which has not been done but not certified is called work uncertified i.e., work done since certification. Work certified and work uncertified will appear on the credit side of the contract account under the heading ‘work-in-progress’. If the work certified is not given, cash received from the contractee and retention money are given; the amount of work certified should be calculated first.

On receipt of certificate, one of the following accounting methods may be adopted:

1. Credit the appropriated contract account with the value mentioned in the certificate and debit personal account of the contractee. Cash received is credited to the contractee’s account and the balance is shown as a debtor representing retention money.
2. The contract account is credited with the value of the certificate and the contractee’s account is debited with the amount payable immediately and a special Retention Money Account is debited with amount so retained, or
3. The contract account id credited with the value of the certified work. Whenever any amount is received from the contractee, cash account is debited and contractee’s account is credited. Until contract is completed, amount received from contractee shows advance payments and is deducted from work in progress in the Balance sheet. When contract is completed, contractee’s account is debited with the contract price and the contract account is credited.