Percentage of completion method,
Definition of Percentage of completion method:
The percentage of completion method of accounting requires the reporting of revenues and expenses on a period-by-period basis, as determined by the percentage of the contract that has been fulfilled. The current income and expenses are compared with the total estimated costs to determine the tax liability for the year. For example, a project that is 20% complete in year one and 35% complete in year two would only have the incremental 15% of the revenue recognized in the second year. The recognition of income and expenses on this work-in-progress basis applies to the income statement, but the balance sheet is handled the same way as the completed contract method.
The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period. This is in contrast to the completed contract method, which defers the reporting of income and expenses until a project is completed. The percentage-of-completion method of accounting is common for the construction industry, but companies in other sectors also use the method.
Revenue recognition method for a contract completed over more than one accounting period. In this method, a portion of the total contract revenue and a portion of the estimated contract costs is recorded in each accounting period. It is an appropriate method where the total cost of performing the contract and the realizable profit are, within reason, predictable and determinable. Formula: Cumulative revenue = Cost incurred to date x contract price ÷ Total estimated cost. See also completed contract method.
How to use Percentage of completion method in a sentence?
- The percentage of completion method has been misused by some companies to boost short-term results.
- This method can only be used if payment is assured and estimating completion is relatively straightforward.
- The percentage of completion method reports revenues and expenses in terms of the work completed to date.
Meaning of Percentage of completion method & Percentage of completion method Definition