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Contract Accounting

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Definition of Contract Accounting

Contract Accounting Image 1

Contract Accounting

Method of accounting for sales or service agreements where completion
requires an extended period.



Related Terms:

Completed-Contract Method

A contract accounting method that recognizes contract revenue
only when the contract is completed. All contract costs are accumulated and reported as expense
when the contract revenue is recognized.


Percentage-of-Completion Method

A contract accounting method that recognizes contract
revenue and contract expenses as progress toward completion is made.


Accounting

A collection of systems and processes used to record, report and interpret business transactions.


accounting

A broad, all-inclusive term that refers to the methods and procedures
of financial record keeping by a business (or any entity); it also
refers to the main functions and purposes of record keeping, which are
to assist in the operations of the entity, to provide necessary information
to managers for making decisions and exercising control, to measure
profit, to comply with income and other tax laws, and to prepare financial
reports.


Accounting and Auditing Enforcement Release (AAER)

Administrative proceedings or litigation releases that entail an accounting or auditing-related violation of the securities laws.



Accounting change

An alteration in the accounting methodology or estimates used in
the reporting of financial statements, usually requiring discussion in a footnote
attached to the financial statements.


Accounting earnings

Earnings of a firm as reported on its income statement.


Contract Accounting Image 2

Accounting entity

A business for which a separate set of accounting records is being
maintained.


Accounting equation

The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.


Accounting equation

The formula Assets = Liabilities + Equity.


accounting equation

An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + owners’ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capital—liabilities and owners’ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.


Accounting Errors

Unintentional mistakes in financial statements. Accounted for by restating
the prior-year financial statements that are in error.


Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.


Accounting insolvency

Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
the books.


Accounting Irregularities

Intentional misstatements or omissions of amounts or disclosures in
financial statements done to deceive financial statement users. The term is used interchangeably with fraudulent financial reporting.


Accounting liquidity

The ease and quickness with which assets can be converted to cash.


Accounting period

The period of time for which financial statements are produced – see also financial year.


Accounting Policies

The principles, bases, conventions, rules and procedures adopted by management in preparing and presenting financial statements.



Accounting rate of return (ARR)

A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.


accounting rate of return (ARR)

the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow


Accounting system

A set of accounts that summarize the transactions of a business that have been recorded on source documents.


Accrual accounting

The recording of revenue when earned and expenses when
incurred, irrespective of the dates on which the associated cash flows occur.


accrual-basis accounting

Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.


Accruals accounting

A method of accounting in which profit is calculated as the difference between income when it is earned and expenses when they are incurred.


Aggressive Accounting

A forceful and intentional choice and application of accounting principles
done in an effort to achieve desired results, typically higher current earnings, whether the practices followed are in accordance with generally accepted accounting principles or not. Aggressive
accounting practices are not alleged to be fraudulent until an administrative, civil, or criminal proceeding takes that step and alleges, in particular, that an intentional, material misstatement
has taken place in an effort to deceive financial statement readers.


Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.


Bullet contract

A guaranteed investment contract purchased with a single (one-shot) premium. Related:
Window contract.


Cash accounting

A method of accounting in which profit is calculated as the difference between income
when it is received and expenses when they are paid.



Cash settlement contracts

Futures contracts, such as stock index futures, that settle for cash, not involving
the delivery of the underlying.


Change in Accounting Estimate

A change in accounting that occurs as the result of new information
or as additional experience is acquired—for example, a change in the residual values
or useful lives of fixed assets. A change in accounting estimate is accounted for prospectively,
over the current and future accounting periods affected by the change.


Change in Accounting Estimate

A change in the implementation of an existing accounting
policy. A common example would be extending the useful life or changing the expected residual
value of a fixed asset. Another would be making any necessary adjustments to allowances for
uncollectible accounts, warranty obligations, and reserves for inventory obsolescense.


Change in Accounting Principle

A change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures
to expensing them. A change in accounting principle is accounted for in most instances
as a cumulative-effect–type adjustment.


Conditional sales contracts

Similar to equipment trust certificates except that the lender is either the
equipment manufacturer or a bank or finance company to whom the manufacturer has sold the conditional
sales contract.


Constant dollar accounting

A method for restating financial statements by reducing or
increasing reported revenues and expenses by changes in the consumer price index,
thereby achieving greater comparability between accounting periods.


Contract

A term of reference describing a unit of trading for a financial or commodity future. Also, the actual
bilateral agreement between the buyer and seller of a transaction as defined by an exchange.


Contract

A formal written statement of the rights and obligations of each party to a transaction.


contract manufacturer

an external party that has been granted an outsourcing contract to produce a part or component for an entity


Contract month

The month in which futures contracts may be satisfied by making or accepting a delivery.
Also called value managers, those who assemble portfolios with relatively lower betas, lower price-book and
P/E ratios and higher dividend yields, seeing value where others do not.


contract vendor

an external party that has been granted an
outsourcing contract to provide a service activity for an entity


Contract Work Hours and Safety Standards Act

A federal Act requiring federal contractors to pay overtime for hours worked exceeding 40 per week.


cost accounting

a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation


Cost Accounting Standards Board (CASB)

a body established by Congress in 1970 to promulgate cost accounting
standards for defense contractors and federal agencies; disbanded
in 1980 and reestablished in 1988; it previously issued
pronouncements still carry the weight of law for those
organizations within its jurisdiction


cost-plus contract

a contract in which the customer agrees
to reimburse the producer for the cost of the job plus a
specified profit margin over cost


Creative Accounting Practices

Any and all steps used to play the financial numbers game, including
the aggressive choice and application of accounting principles, both within and beyond
the boundaries of generally accepted accounting principles, and fraudulent financial reporting.
Also included are steps taken toward earnings management and income smoothing. See Financial
Numbers Game.


Creative Acquisition Accounting

The allocation to expense of a greater portion of the price
paid for another company in an acquisition in an effort to reduce acquisition-year earnings and
boost future-year earnings. Acquisition-year expense charges include purchased in-process research
and development and an overly aggressive accrual of costs required to effect the acquisition.


Cumulative Effect of a Change in Accounting Principle

The change in earnings of previous years
based on the assumption that a newly adopted accounting principle had previously been in use.


Cumulative Effect of Accounting Change

The change in earnings of previous years assuming
that the newly adopted accounting principle had previously been in use.


double-entry accounting

See accrual-basis accounting.


Financial accounting

The production of financial statements, primarily for those interested parties who are external to the business.


financial accounting

a discipline in which historical, monetary
transactions are analyzed and recorded for use in the
preparation of the financial statements (balance sheet, income
statement, statement of owners’/stockholders’ equity,
and statement of cash flows); it focuses primarily on the
needs of external users (stockholders, creditors, and regulatory
agencies)


Floating-rate contract

A guaranteed investment contract where the credit rating is tied to some variable
("floating") interest rate benchmark, such as a specific-maturity Treasury yield.


Forward contract

A cash market transaction in which delivery of the commodity is deferred until after the
contract has been made. It is not standardized and is not traded on organized exchanges. Although the
delivery is made in the future, the price is determined at the initial trade date.


forward contract

Agreement to buy or sell an asset in the future at an agreed price.


Forward forward contract

In Eurocurrencies, a contract under which a deposit of fixed maturity is agreed to
at a fixed price for future delivery.


Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.


futures contract

Exchange-traded promise to buy or sell an asset in the future at a prespecified price.


Futures Contract

A contract in which the seller agrees to provide something to a buyer at a specified future date at an agreed price.


Futures contract multiple

A constant, set by an exchange, which when multiplied by the futures price gives
the dollar value of a stock index futures contract.


Gain-on-Sale Accounting

Up-front gain recognized from the securitization and sale of a pool
of loans. Profit is recorded for the excess of the sales price and the present value of the estimated
interest income that is expected to be received on the loans above the amounts funded on the loans
and the present value of the interest agreed to be paid to the buyers of the loan-backed securities.


Generally Accepted Accounting Principals (GAAP)

A technical accounting term that encompasses the
conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.


Generally accepted accounting principles

The rules that accountants follow when processing accounting transactions and creating financial reports. The rules are primarily
derived from regulations promulgated by the various branches of the AICPA Council.


generally accepted accounting principles (GAAP)

This important term
refers to the body of authoritative rules for measuring profit and preparing
financial statements that are included in financial reports by a business
to its outside shareowners and lenders. The development of these
guidelines has been evolving for more than 70 years. Congress passed a
law in 1934 that bestowed primary jurisdiction over financial reporting
by publicly owned businesses to the Securities and Exchange Commission
(SEC). But the SEC has largely left the development of GAAP to the
private sector. Presently, the Financial accounting Standards Board is
the primary (but not the only) authoritative body that makes pronouncements
on GAAP. One caution: GAAP are like a movable feast. New rules
are issued fairly frequently, old rules are amended from time to time,
and some rules established years ago are discarded on occasion. Professional
accountants have a heck of time keeping up with GAAP, that’s for
sure. Also, new GAAP rules sometimes have the effect of closing the barn
door after the horse has left. accounting abuses occur, and only then,
after the damage has been done, are new rules issued to prevent such
abuses in the future.


generally accepted accounting principles (GAAP)

Procedures for preparing financial statements.


Generally Accepted Accounting Principles (GAAP)

A common set of standards and procedures
for the preparation of general-purpose financial statements that either have been established
by an authoritative accounting rule-making body, such as the Financial accounting
Standards Board (FASB), or over time have become accepted practice because of their universal
application.


Generally Accepted Accounting Principles (GAAP)

GAAP is the term used to describe the underlying rules basis on which financial statements are normally prepared. This is codified in the Handbook of The Canadian Institute of Chartered Accountants.


Guaranteed insurance contract

A contract promising a stated nominal interest rate over some specific time
period, usually several years.


Guaranteed investment contract (GIC)

A pure investment product in which a life company agrees, for a
single premium, to pay the principal amount of a predetermined annual crediting (interest) rate over the life of
the investment, all of which is paid at the maturity date.


Hell-or-high-water contract

A contract that obligates a purchaser of a project's output to make cash
payments to the project in all events, even if no product is offered for sale.


Implicit Contract

An unwritten understanding between two groups, such as an understanding between an employer and employees that employees will receive a stable wage despite business cycle activity.


internal accounting controls

Refers to forms used and procedures
established by a business—beyond what would be required for the
record-keeping function of accounting—that are designed to prevent
errors and fraud. Two examples of internal controls are (1) requiring a
second signature by someone higher in the organization to approve a
transaction in excess of a certain dollar amount and (2) giving customers
printed receipts as proof of sale. Other examples of internal
control procedures are restricting entry and exit routes of employees,
requiring all employees to take their vacations and assigning another
person to do their jobs while they are away, surveillance cameras, surprise
counts of cash and inventory, and rotation of duties. Internal controls
should be cost-effective; the cost of a control should be less than
the potential loss that is prevented. The guiding principle for designing
internal accounting controls is to deter and detect errors and dishonesty.
The best internal controls in the world cannot prevent most fraud
by high-level managers who take advantage of their positions of trust
and authority.


Management accounting

The production of financial and non-financial information used in planning for the future; making decisions about products, services, prices and what costs to incur; and ensuring that plans are implemented and achieved.


management accounting

a discipline that includes almost
all manipulations of financial information for use by managers
in performing their organizational functions and in
assuring the proper use and handling of an entity’s resources;
it includes the discipline of cost accounting


Management Accounting Guidelines (MAGs)

pronouncements of the Society of Management Accountants of
Canada that advocate appropriate practices for specific
management accounting situations


McNamara-O'Hara Service Contract Act of 1965

A federal Act requiring federal contractors to pay those employees working on a federal contract at
least as much as the wage and benefit levels prevailing locally.


Most distant futures contract

When several futures contracts are considered, the contract settling last.
Related: nearby futures contract


Nearby futures contract

When several futures contracts are considered, the contract with the closest
settlement date is called the nearby futures contract. The next futures contract is the one that settles just after
the nearby futures contract. The contract farthest away in time from settlement is called the most distant
futures contract.


Next futures contract

The contract settling immediately after the nearby futures contract.


Nexus (of contracts)

A set or collection of something.


Open contracts

contracts which have been bought or sold without the transaction having been completed by
subsequent sale or purchase, or by making or taking actual delivery of the financial instrument or physical
commodity.


Optimal contract

The contract that balances the three types of agency costs (contracting, monitoring, and
misbehavior) against one another to minimize the total cost.


Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).


Options contract multiple

A constant, set at $100, which when multiplied by the cash index value gives the
dollar value of the stock index underlying an option. That is, dollar value of the underlying stock index = cash
index value x $100 (the options contract multiple).


Purchase accounting

Method of accounting for a merger in which the acquirer is treated as having purchased
the assets and assumed liabilities of the acquiree, which are all written up or down to their respective fair
market values, the difference between the purchase price and the net assets acquired being attributed to goodwill.


Regulatory accounting procedures

accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
asset sold.


responsibility accounting system

an accounting information system for successively higher-level managers about the performance of segments or subunits under the control
of each specific manager


Set of contracts perspective

View of corporation as a set of contracting relationships, among individuals
who have conflicting objectives, such as shareholders or managers. The corporation is a legal contrivance that
serves as the nexus for the contracting relationships.


Staff Accounting Bulletin (SAB)

Interpretations and practices followed by the staff of the Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure
requirements of the federal securities laws.


Statement of Financial Accounting Standards No. 52

This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: Statement of Financial accounting
Standards No. 8.


Statement of Financial Accounting Standards No. 8

This is a currency translation standard previously in
use by U.S. accounting firms. See: Statement of accounting Standards No. 52.


Statement on Management Accounting (SMA)

a pronouncement developed and issued by the Management
accounting Practices Committee of the Institute of Management
Accountants; application of these statements is
through voluntary, not legal, compliance


Strategic management accounting

The provision and analysis of management accounting data about a business and its competitors, which is of use in the development and monitoring of strategy (Simmonds).


Take-or-pay contract

A contract that obligates the purchaser to take any product that is offered to it (and pay
the cash purchase price) or pay a specified amount if it refuses to take the product.


Turnkey construction contract

A type of construction contract under which the construction firm is
obligated to complete a project according to prespecified criteria for a price that is fixed at the time the
contract is signed.


Walsh-Healey Public Contracts Act of 1936

A federal Act that forces government contractors to comply with the government’s minimum wage and hour rules.


Window contract

A guaranteed investment contract purchased with deposits over some future designated
time period (the "window"), usually between 3 and 12 months. All deposits made are guaranteed the same
credit rating.
Related: bullet contract.



 

 

 

 

 

 

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