Attributable Profit
Attributable profit represents the share of the total projected profit from a long-term contract that corresponds to the portion of work completed by a specific accounting date. This calculation takes into account estimated costs for remedial work, maintenance, and other non-recoverable expenses.
Examples§
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Construction Project:
- A construction company is working on a multi-year infrastructure project. At the end of the annual accounting period, the project is 60% complete. The total estimated profit for the project is $1,000,000, with anticipated remedial and maintenance costs of $50,000. The attributable profit for the completed part of the project would be calculated by considering the percentage of completion and subtracting the estimated costs.
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Software Development:
- A software firm is hired to develop a custom software solution over three years. By the end of the first year, 40% of the work is done. If the total estimated profit is $300,000 and unforeseen future non-recoverable costs are expected to be $20,000, the attributable profit reflecting the completed work at year-end will be determined after accounting for these non-recoverable costs.
Frequently Asked Questions (FAQs)§
What is the significance of attributable profit in long-term contracts?§
Attributable profit helps in recognizing the fair share of a project’s profit proportionate to the amount of work completed over a specific period, ensuring accurate profit reporting and financial transparency.
How is attributable profit different from gross profit?§
Gross profit is the revenue remaining after deducting the cost of goods sold without considering long-term estimations. Attributable profit, on the other hand, pertains to long-term contracts and takes into consideration future remedial, maintenance, and non-recoverable costs.
Can attributable profit be a negative number?§
If the estimated costs become excessively high and surpass the allocated profit for the completed work, the attributable profit could potentially be negative, reflecting a loss on that portion of the project.
How frequently should attributable profit be calculated?§
Attributable profit should be updated at every accounting period during the lifecycle of the long-term contract, ensuring the financial statements accurately reflect the progress and profitability of the contract.
Related Terms§
- Long-term Contract: Agreements spanning over multiple accounting periods, requiring the assessment of profit and loss at different stages of completion.
- Maintenance Costs: Ongoing expenses incurred for the upkeep of assets or projects.
- Non-recoverable Costs: Expenses that cannot be reclaimed or offset by income.
- Percentage of Completion Method: An accounting principle used to determine the revenue and expenses related to long-term contracts based on the project’s level of completion.
Online References§
Suggested Books for Further Studies§
- “Accounting for Long-Term Contracts” by Patrick R. Delaney
- “Financial and Management Accounting” by Pauline Weetman.
Accounting Basics: “Attributable Profit” Fundamentals Quiz§
Thank you for exploring attributable profit and testing your knowledge on this crucial accounting concept. Keep enhancing your financial understanding and stay competitive!
