Percentage of Completion Method - Definition
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Percentage of Completion Method Definition
The percentage of completion method is used in accounting through which the revenue and expenses of a long-term project are realized based on the percentage of work that has been completed during the period. The percentage of completion method offers a work-in-progress method of evaluating revenue and expenses in long-term contracts. The completed-contract method is different from the percentage of completion method given that expenses and revenues are calculated after the completion of a project.
A Little More on What is the Percentage of Completion Method
Using the percentage of completion method entails that a work-in-progress is given on an ongoing project. This means expenses and revenue are reported at each stage of the project. The report given is determined by the stage of completion of the project. In the percentage of completion method, recognition of expenses and revenues using a period-by-period basis only applies to the income statement as the balance sheet is not different from that of the completed contract method. Also, the percentage of completion method is only applicable to long-term projects. Here are some important crucial points you should know about the percentage of completion method;
- This method differs from the completed contract method because it reports revenues and expenses on a period-by-period or work-in-progress bases.
- In the percentage of completion method, reports are given based on the stage of the completion of the project.
- Reports given during the project cause no changes in the balance sheet, but the income statement carries such reports.
Examples of the Percentage of Completion Method
The percentage of completion method of accounting is usually used in the construction industry or by contractors who have projects in energy, public infrastructure, and others. Generally, this accounting method applies to long term projects. For instance; Agency XYZ is a construction company given a project to construct a big bus terminal for a metropolis. This contract is lo last for more than 12 months and the construction company also billed the company for the project. Once the project commences, Agency XYZ uses the percentage of completion accounting method to report the costs and revenue of the contract stage by stage. The reports will be categorized as 'contract work in progress' report and this would be done throughout the stages of the project.
Potential for Abuse of the Percentage of Completion Method
There is a tendency for the percentage of completion method to be misused or abused by companies or contractors. This method is used to perpetrate unethical activities such as boosting short-term results using this method. Also, there is a tendency for companies or contractors to bloat the expenses and revenues recorded at a particular period. By overstating or understating costs, companies can defraud project owners.
References for Percentage Of Completion Method
https://www.accountingtools.com/articles/2017/5/.../percentage-of-completion-methodhttps://corporatefinanceinstitute.com Resources Knowledge Accountinghttps://www.investopedia.com/terms/p/percentage-of-completion-method.asphttps://en.wikipedia.org/wiki/Percentage-of-completion_methodhttps://www.wallstreetmojo.com Accounting Income Statement