The percentage of completion method is an accounting method which recognizes the long term construction contract revenue over the life of the contract based on its “percentage of completion”, which is typically estimated by dividing the total construction costs incurred to date by the total estimated costs of the contract. On the contrary, the completed-contract method is an accounting method which recognizes revenue only upon completion of the contract.
The main difference between the two methods is the timing of recognition of the long term construction contract revenue – whether the revenue is recognized in the process of the construction or at the completion point of the construction work.
THE ASSUMPTION AND FACTS REQUIRED FOR USING PERCENTAGE OF COMPLETION METHOD
The use of the percentage of completion method requires that the progress toward completion, the revenue, and the cost of the construction work can be reasonably estimated, and also the following conditions should exist:
The contract clearly specifies the rights regarding goods or services to be provided, and the consideration to be exchanged. The buyer can be expected to satisfy all the contractual obligations. The contractor can be expected to perform the contractual obligations.
HOW THE PERCENTAGE OF COMPLETION METHOD FUNCTIONS
As previously mentioned, the “percentage of completion” of the construction is typically estimated by dividing the total construction costs incurred to date by the total estimated costs of the contract. However, some other rational and systematic measures of progress toward completion, for example, the physical measures of output completed, hours of labor, can also be used to calculate the percentage of completion if they are considered appropriate and justifiable.
Once the particular measure of completion is determined and the percentage of completion is...