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, calculate the profit to be credited to the Profit and Loss Account:
The standard formula is:
Profit to be credited = Notional Profit × (Cash received / Work Certified) × (Work Certified / Contract Price)
But for incomplete contracts, a simpler rule used is:
Profit to be credited = Notional Profit × (Cash received / Work Certified)
So,
= ₹ 79,000 × (₹ 3,30,000 / ₹ 4,00,000)
= ₹ 79,000 × 0.825
= ₹ 65,175
Therefore, ₹ 65,175 can be prudently credited to the Profit and Loss Account.
Meaning of Notional Profit:
Notional profit in contract costing means the difference between the value of work certified and the cost of work certified to date.
It is a temporary profit figure calculated for incomplete contracts to estimate how much profit can be safely taken to the profit and loss account.
It prevents excessive profit booking before the contract is fully completed.
Notional profit ensures that profit is recognised in proportion to the work completed and cash received.