Question

It is important to consider profit on incomplete contracts after providing for the .............. .

• A. Unknown contingencies
• B. Known contingencies
• C. Depreciation
• D. Depletion

Hint:

Always keep a margin for unknown costs in long-term contracts.

Answer 1

The Correct Option is A

In contract costing, when a contract is incomplete at the end of an accounting period, a portion of profit may be taken to the profit and loss account.
However, it is important to consider that unexpected expenses or losses may arise before the contract is fully completed.
To ensure that the profit recognized is not overstated, a provision is made for unknown contingencies — possible costs or losses that cannot be exactly predicted.
This conservative approach avoids the risk of overstatement of profit on work not yet finished.
Therefore, profit on incomplete contracts is considered only after providing for unknown contingencies.