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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.

  1. 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.
  2. The buyer can be expected to satisfy all obligations under contract.
  3. 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
Company Name
Balance Sheet
On this date
Current assets  
Accounts receivable ($900,000 - $750,000) $150,000
Construction in process $1,125,000
Less: Billing 900,000  
Cost and recognized profit in excess of billings $225,000