Percentage of Completion Method

The percentage of completion method is a method of accounting for long-term construction contracts in which the contractor recognizes income as work progresses. Under this method, the contractor estimates the total cost of the contract and the total revenue to be received. The contractor then divides the total cost by the total revenue to arrive at a percentage of completion. This percentage is used to determine the amount of income to be recognized in each period.

The percentage of completion method is often used for construction contracts that are expected to take more than one year to complete. This method is more accurate than the completed contract method, which recognizes all income at the time the contract is completed. However, the percentage of completion method can be more complex to apply than the completed contract method.

The percentage of completion method is based on the following assumptions:

* The contractor will complete the contract.
* The costs incurred to date will be recovered.
* The contract price will not be changed.

The percentage of completion method is applied as follows:

1. The contractor estimates the total cost of the contract and the total revenue to be received.
2. The contractor divides the total cost by the total revenue to arrive at a percentage of completion.
3. The contractor multiplies the percentage of completion by the costs incurred to date to determine the amount of income to be recognized in the current period.

The percentage of completion method is used for both long-term contracts and short-term contracts. However, the application of the method is different for long-term contracts and short-term contracts.

For long-term contracts, the contractor must estimate the total cost of the contract and the total revenue to be received. The contractor then divides the total cost by the total revenue to arrive at a percentage of completion. This percentage is used to determine the amount of income to be recognized in each period.

For short-term contracts, the contractor does not have to estimate the total cost of the contract and the total revenue to be received. The contractor simply recognizes all income at the time the contract is completed.

The percentage of completion method is a more accurate method of accounting for long-term construction contracts than the completed contract method. However, the percentage of completion method can be more complex to apply than the completed contract method.