Percentage of completion method

Definition

The percentage of completion method is an accounting technique used to recognize revenue and expenses for long-term projects based on the project's progress. It matches revenues with the costs incurred, providing a more accurate depiction of financial performance over time.

5 Must Know Facts For Your Next Test

1. Revenue is recognized proportionally to the work completed during the accounting period.
2. Costs associated with the project are also recognized as they are incurred.
3. This method is commonly used in industries like construction and engineering where projects span multiple accounting periods.
4. The percentage of completion can be determined using input measures (e.g., costs incurred) or output measures (e.g., milestones achieved).
5. Accurate estimates are crucial; significant changes in estimates can lead to restatements.

Review Questions

• How does the percentage of completion method differ from the completed contract method?
• What are two ways to measure the percentage of completion for a project?
• Why is it important to have accurate cost and revenue estimates when using this method?

Related terms

Completed Contract Method:

An accounting method where revenue and expenses are recognized only when the contract is completed.

Revenue Recognition Principle:

The principle that dictates how and when revenue is recognized in financial statements.

Long-Term Projects: Projects that span over multiple accounting periods, often requiring special revenue recognition methods like percentage of completion.