Question

Given the notional profit as ₹ 79,000, cash received ₹ 3,30,000, work certified ₹ 4,00,000, contract price ₹ 6,00,000. Calculate the profit that can be credited to the Profit and Loss Account. Also, explain what is notional profit in case of contract costing.

Hint:

Notional profit is provisional profit for incomplete contracts.

Answer 1

First, determine the profit to be transferred to the Profit and Loss Account. The standard calculation is: Profit to be credited = Notional Profit × (Cash received / Work Certified) × (Work Certified / Contract Price) However, for ongoing contracts, a simplified approach is applied: Profit to be credited = Notional Profit × (Cash received / Work Certified) Applying this simplified rule: = ₹ 79,000 × (₹ 3,30,000 / ₹ 4,00,000) = ₹ 79,000 × 0.825 = ₹ 65,175 Consequently, ₹ 65,175 is the amount that can be prudently recognized in the Profit and Loss Account. Understanding Notional Profit: In contract costing, notional profit represents the excess of the value of work certified over the cost of work certified to date. This is a provisional profit figure, calculated for incomplete contracts, to gauge the amount of profit that can be safely allocated to the profit and loss account. This practice avoids the premature booking of excessive profits before the contract's full completion. Notional profit ensures that profit recognition aligns with the proportion of work completed and cash received.