Revenue Recognition: Percentage of Completion Formula Example
In case of long-term contracts, accountants need a basis to apportion the total contract revenue between the multiple accounting periods. Percentage of completion method provides one of those bases, other being full-contract method. Taxable income from a long-term contract is determined under the percentage-of-completion method (Sec. 460(a)). When using the percentage of completion method, it’s important for contractors to revise their estimates anytime changes occur on the job. This ensures the accuracy of their accounting calculations, and helps to avoid cash flow challenges. Contractors often prefer the completed contract method when it's tough to estimate the actual costs of a project. It's also favored when managing multiple projects simultaneously or when a project is short-term. Based on the percentage of completion calculated using cost date we determine than revenue of…