Contract (or terminal) costing, is one form of application of the principles of job order costing. In contract costing each contract is treated as a cost unit and costs are ascertained separately for each contract. It is suitable for business concerned with building or engineering projects or structural or construction contracts.
Usually, there is a separate account for each contract. Also the number of contracts undertaken at a time, generally, not being very large, the Contract Ledger can very well be operated as part of the financial books. The contract account is debited with all direct and indirect expenditure incurred in relation to the contract. It is credited with the amount of contract price on completion of the contract. The balance represents profit or loss made on the contract and is transferred to the profit and loss account. In case, the contract is not completed at the end of the accounting period, a reasonable amount of profit, out of the total profit made so far on the incomplete contract, may be transferred to profit and loss account.