Percentage-of-Completion Method
In long projects, multi period, revenue needs to be recognized before completion. Companies must use the percentage-of-completion methods when estimates of progress toward completion, revenue, and costs are reasonably and dependably; as well as the following conditions exist.
- The contract clearly specifies the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement.
- The buyer can be expected to satisfy all obligations under contract.
- The contractor can be expected to perform the contractual obligations
Two important accounts are used in percentage of completion: An asset account typically called
Construction in Progress and a contra account often called Progress Billings or
Billings on Construction in Process.
|
Date
|
Account Title & Explanation
|
Ref
|
Debit
|
Credit
|
|
|
Construction in Process |
|
1,000,000 |
|
|
|
Materials, Cash, Payables, etc. |
|
|
1,000,000 |
|
|
To record cost of construction |
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable |
|
900,000 |
|
|
|
Billings on Construction in Process |
|
|
900,000 |
|
|
To recored progress billings |
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
750,000 |
|
|
|
Accounts Receivable |
|
|
750,000 |
|
|
To record collections |
|
|
|
|
|
|
|
|
|
To recognize revenue and gross profit each year. To record completion and final approval of project
|
Date
|
Account Title & Explanation
|
Ref
|
Debit
|
Credit
|
|
|
Construction in Process (gross profit) |
|
125,000 |
|
|
|
Construction Expenses |
|
1,000,000 |
|
|
|
Revenue from Long-Term Contracts |
|
|
1,125,000 |
|
|
To recognize revenue and gross profit |
|
|
|
|
|
|
|
|
|
|
|
Billings on Construction in Process |
|
1,125,000 |
|
|
|
Constructin in Process |
|
|
1,125,000 |
|
|
To record completion of the contract |
|
|
|
|
|
|
|
|
|
presented on statements as
| Company Name |
| Income Statement |
| For the Period Ended |
| Revenue from long-term contracts |
|
$1,125,000 |
| Costs of construction |
|
1,000,000 |
Gross profit
|
|
$125,000 |
|
|
|
| Company Name |
| Balance Sheet |
| On this date |
| Current assets |
|
|
| Accounts receivable ($900,000 - $750,000) |
|
$150,000 |
Inventory
|
|
|
| Construction in process |
$1,125,000 |
|
| Less: Billing |
900,000 |
|
| Cost and recognized profit in excess of billings |
|
$225,000 |
| |
|
|