How do I find the amount of revenue to be recognized under the percentage of completion method?
Sep 09, 2010 in
Business
I know:
the Cumulative cost incurred to the end of the each year
Expected costs to complete
Billings to the end of the year
Collections to the end of the year
I need to know how to calculate the amount of income that should be recognized for the last year.
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One comment
Tom Z on September 9, 2010 at 11:48 pm
The percentage-of-completion method is generally the required method of financial and tax accounting of larger construction companies for long-term contracts. Its justification relies largely on the matching principle in accounting, where revenues and expenses are matched in the applicable accounting period.
The percentage-of-completion method attempts to recognize revenues and gross profit in the applicable periods of construction, and not soley in the period when the construction has been completed, as in the completed contract method. The degree of completion of the construction, i.e., the percentage-of-completion, is typically estimated by dividing the total construction costs incurred to date by the total estimated costs of the contract, or job.
% complete = Total construction costs to date/Total estimated costs of contract
Total estimated revenues or gross profit is then multiplied by this percentage of completion to derive the total revenues or gross profit that have been earned to date.
Gross profit to date = % complete X Total estimated gross profit