The Percentage of Completion (POC) method is often used with construction based projects that extend over the course of several years. Many accountants prefer the percentage completion accounting over the Completed Contract Method because it paints a more realistic view of the company. Because the projects are usually long term lasting several years it estimates completion for the company so it can show revenues year by year than to just all of the sudden have one large inflow at the end where the project was completed.
The Percentage of completion formula is very simple. It simply takes an estimated percentage of how close the project is to being completed by taking the cost to date for the project over the total estimated cost. The percentage calculated is then multiplied by the total project revenue to compute revenue for the period. The construction income can then be derived by subtracting the cost from the period revenue.
The percentage completion formula and other associated formulas can be simplified as follows:
Period Costs (annual , quarterly, etc.)/ Total Estimated Cost = Percentage Completed
Percentage Completed * Total Project Revenue = Period Revenue
Period Revenue – Period Costs = Project Income