Accounting treatment for order

You are correct and that can be called as an onerous contract and recognise it in profit or loss

@ Sabyasachi sir @ Atharv Happy New Year 2022. My year passed away quickly with many professionals. Thank you all

Onerous costs are unavoidable costs incurred during the manufacturing. 

People create a provision for them. 

The net cost of exiting is included in that.

This provisioning is done as per provisions standard and written off accordingly, however, if you follow revenue recognised over time with customers, you will find the 

actual loss

-gross loss using stage of completion (till date loss)

= provision for onerous contract. 

It’s easy from example problems to understand. Cheers

To continue after lunch 🥗 

total contract is thousand 

costs till date is four hundred and revenue as well per say without a markup

costs yet to incur is six hundred usually. Then there is no loss here. However, the same treatment can be applied. 

By contract account 400

To bank account 400

now revenue

By contract account 400

To revenue account 400 -> this is like recognising the works cost of l furniture job done. 

now cost of goods sold

By COGS a/c 1000-> already material purchased for this amount.

To contract account 400

To provision for onerous contract 600

the estimates can be fitted here, supposing 600 is provided until the contract is completely terminated, then after termination 

by provision for onerous contract 600

To Inventory 600

this is called as a write off. There are other factors like stage of completion must be used to calculate revenue and cost of goods sold.

Oops, you can change off the first entry value to 1000 since we purchased all the inventory before hand. If we have real numbers, it is easy to calculate. 

Then recognise all the material intended to make furniture 

Inventory write off a/c

To Inventory a/c

Sorry for the delay

But you have to do the inventory valuations before you do write off obsolete material. Or else if it has resale value, do calculations as per it.

I get confused my self and finally I got it right. If you have closing inventory as thousand

the order was stopped for five hundred

then try to sell the goods outside. Supposing if 500 worth cancelled goods is 300 in your market

then that is NRV.

So, Inventory is undervalued by five minus three hundred is two hundred worth Inventory. So adjust that in thousand which gives us eight hundred as closing inventory. 

In the next scenario, if goods cannot be sold or no resale value, then thousand minus five hundred is five hundred Inventory must be written off as obsolete.