Calculating contract assets is an important task for any business, as it allows you to determine the revenue that has been earned but not yet invoiced. Essentially, contract assets are the unbilled amounts that a business has a right to collect, which have arisen from fulfilling contract obligations.
To calculate your contract assets, you will need to take into account several factors, including the contract price, any changes or modifications to the contract terms, the percentage of completion, and the amount of money that has been invoiced.
Here are the steps you can follow to calculate your contract assets accurately:
Step 1: Determine the Contract Price
The first step in calculating contract assets is to determine the contract price, which is the amount that the customer has agreed to pay for the product or service you are providing. This price is typically stated in the contract and may be subject to change based on any modifications or changes that are made to the contract terms.
Step 2: Calculate the Percentage of Completion
Next, you will need to calculate the percentage of completion of the contract. This can be done by dividing the total cost of the work completed to date by the total expected cost of completing the contract. For example, if you have completed $50,000 worth of work on a $100,000 contract, the percentage of completion would be 50%.
Step 3: Determine the Amount Invoiced
Once you have determined the contract price and percentage of completion, you will need to determine the amount that has been invoiced to the customer. This can be found by adding up all the invoices you have sent to the customer for work completed to date.
Step 4: Calculate the Contract Asset
Finally, you can calculate the contract asset by subtracting the amount invoiced from the total revenue that has been earned based on the percentage of completion. For example, if the total revenue earned based on the percentage of completion is $75,000 and the amount invoiced is $25,000, the contract asset would be $50,000.
In conclusion, calculating contract assets is an essential task for any business that wants to accurately track its revenue. By following these steps, you can ensure that you are calculating your contract assets correctly and maintaining accurate financial records.