Job costing and Contract Costing

Job Costing and Contract costing

The main difference between the job costing and contract costing is the scale and the duration of work. Job costing deal with a small scale of work to be completed in short duration.contract costing is a large scale activity is to be undertaken in a long duration.

The accounting methodology in both costings are same and cost are allocated in unique cost center i.e job account and contract respectively.

Cash flows indicate the Direction

Cash flow indicate the direction of the organization and clearly explain the long term plan of the management. The management is planing for expansion then it would be reflected in the investing section of the cash flow and there would be a huge movement in that section of cash flow.


However if management believe that more depth in current business is required this is also be reflected in the investing activities and entity would be purchasing the fixed asset for the current business expansion .

Management plan to back the entity profit with asset may also be seen in the cash flow and management would be heavily investing on fixed asset.


Management plan to maximize the profit would be reflected by a huge activity level would be observed in operating section of the cash flow.

Management future planing about the equity structure and financing methodology is also reflected in the financing activity portion. The new introduction of capital in financing activity is a clear indication of more reliance on equity.

Cash flows are better than accounting profit

Cash flows are better than accounting profit because accounting profit can be manipulated with the help of accounting policies whereas the little can be done with cash flows.

The user can understand the cash flow more easily than accounting profit as accounting profit involves many technicalities where the cash flow are prepared on simple concept of cash inflows and cash flows. This simple concept improves the understanding of user.

 Cash flow give a better view of organization activities that where the cash is being spent.it also give an idea that how the cash is being generated by the organization. Therefore cash flow give you an ideas about the strength of organization.

Cash also give you an idea about the liquidity position of the entity. The liquidity is important factor to support operations. This sufficient funds give a confidence to equity holder that entity have sufficient fund to run its operations.

Cash flow also give a long term direction of the organization by pattern of expenditure. if entity investing in fixed assets and launching new project it means that entity has long term growth strategy but if entity in investing in working capital it means that entity is more focused on existing business.

Cash flow also put a light on important payment like interest , loan and dividend. if the organization is paying these amount this shows the organization ability to fulfill its commitment and there is no apparent reason of default.

Purchases are expense or inventory

Purchase is basically an inventory and therefore debit in the books accounts. The purchases then charge to the income statement at the period end . There are two ways of charging purchases to expenses one is directly charged to profit and loss at the period end and adjusted by the physical inventory count by debiting inventory and crediting profit and loss at the period end. The other way is to charge the purchases to stock account and stock account regular charged cost of good sold when the goods are sold. The stock account is showing the stock in hand figure at all time.


The purchases account maintained separate from the inventory account because the inventory basically represent the unsold good in hand where the purchases account shows the whole purchased made during the year. Therefore the purchases is basically an inventory but will be expense out either during the period or at end of the period and unsold purchases will form part of closing inventory.