Completed Contract Method Vs Percentage of Completion

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When it comes to accounting for long-term construction projects, the two most commonly used methods are the completed contract method and the percentage of completion method. Both methods have their pros and cons, and it`s important to understand the differences between them to determine which is best for your business.

The completed contract method is a simple method that recognizes revenue only when the project is completed. This means that all the revenue and expenses related to the project are recorded only when the project is fully finished. This method is useful for businesses that have a short-term project and do not want to recognize revenue until the project is complete.

On the other hand, the percentage of completion method is a more complex method that recognizes revenue and expenses based on the progress of the project. This method requires more detailed record-keeping, including tracking the percentage of the project that is completed and the corresponding costs incurred.

One advantage of the percentage of completion method is that it allows businesses to recognize revenue and expenses progressively throughout the project. This can be particularly beneficial for long-term projects that span several years, as it provides a more accurate picture of the project`s financial performance.

In addition to providing a more detailed snapshot of a project`s financial performance, the percentage of completion method can also help businesses manage risk. By tracking the progress of a project and the corresponding costs incurred, businesses can identify potential issues earlier and take corrective action to minimize any negative impacts.

However, the percentage of completion method can also be more complicated to implement. It requires detailed and accurate record-keeping, and businesses must be able to accurately estimate the total costs of a project to calculate the percentage of completion correctly.

Overall, the completed contract method and the percentage of completion method are both valuable tools for accounting for long-term construction projects. Choosing the right method depends on the size and complexity of the project, as well as the level of detail and accuracy required in the financial reporting. Consult with your accountant to determine which method is best for your business.