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Percentage Completion (POC) Method

See Also:
Percentage Completion Method Example
Accounting Principles
Point of Sale Method (POS)
Installment Method
Completed Contract Method
Collection Method
Work Breakdown Structure (WBS)

Percentage Completion (POC) Method

Use the Percentage Completion (POC) method with construction based projects that extend over the course of several years. Furthermore, many accountants prefer the percentage completion accounting over the Completed Contract Method. It also 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 shows revenues year by year than to just all of the sudden have one large inflow at the end where the project was completed.


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Percentage Completion (POC) Method Formula

The Percentage of completion formula is very simple. First, take 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. Then multiply the percentage calculated by the total project revenue to compute revenue for the period. Then derive the construction income by subtracting the cost from the period revenue.

Use the following simplified equations for the percentage completion formula and other associated formulas:

Period Costs (annual , quarterly, etc.)/ Total Estimated Cost = Percentage Completed

Percentage Completed * Total Project Revenue = Period Revenue

Period Revenue – Period Costs = Project Income

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Percentage Completion (POC) Method

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Completed Contract Method

See Also:
Accounting Principles
Percentage of Completion Method
Installment Method
Point of Sale Method (POS)
Cost Recovery Method

Completed Contract Method Definition

The completed contract method is also known as the contract completion method. It is a form of revenue recognition used for project based accounting such as construction. The completed contract method of accounting records all revenue earned on the project in the period when a project is done.

Completed Contract Method Meaning

The Completed Contract Method of revenue recognition is normally only used in the short-term. For example, projects that last less than a year are considered short-term. It is anything over a year, then most firms prefer the percentage of completion method because it paints a more realistic picture in the long term. However, for firms that are more conservative the complete contract method becomes appropriate because the revenue will not be recognized until the total cost has been accounted for and all the revenue has been received.

Completed Contract Method Example

The following represents an example to help explain completed contract method accounting:

Bob works for Whistle-at-You Construction Co. (WAY). He has obtained the following information via a contract with a company. This company is in need of refurbishing some office space. Whistle-at-You believes that they will be able to complete the project in 8 months. WAY uses the completed contract method of revenue recognition when it is dealing with projects that will only lasts under a year. The contract states that the company will pay WAY $5 million upon completion of the project. The estimated costs equal $4 million.

At the end of the construction, which ended up being 9 months instead of 8 months, the company pays the $5 million to WAY. But the actual cost for the project amounted to $4.5 million dollars. Because the project is completed Bob will recognize revenue in the amount of $5 million and the actual cost of construction of $4.5 million. Therefore, he will correctly state the income at $500,000.

Note: If Bob had used the percentage of completion method, then the company would have made some adjusting entries to correct for the extra costs and the extended month. This is one major advantage that completed contract method revenue recognition has over the percentage completion method.

completed contract method

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Accounting Principles 5, 6, and 7

See Also:
Accounting Principles 1, 2, and 3
Continuous Accounting: The New Age of Accounting
Accounting Concepts
Point of Sale (POS) Method
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB)
Adjusting Entries
Accumulated Amortization

Accounting Principles 5, 6, and 7 Description

Basic accounting principles are both generally held and regulated under Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) also provides rulings and general practices with regard to these accounting principles. Some of these principles of accounting also contain underlying concepts or methods that may be used as it pertains to that company’s particular industry or business venture. Let’s look at the Revenue Principle, the Matching Principle, and the Disclosure Principle

Revenue Principle

The Revenue Principle, also known as the Revenue Recognition Principle, contains several different methods regarding the timing and amount to record as revenue. In accordance with this, meet the following three conditions for each and every sale. First, a company must have performed a service or provided a product to expect a return from the buying party. Then the amount of the sale should be readily measurable. Finally, there should be a reasonable amount of expectation that the company will receive payments. But to insure that this happens, the following six methods of accounting for revenue. which differ according to conditions that surround the business model, can be found below:

1) Sales Method

2) Completed Production Method

3) Collection Method

4) Installment Method

5) Percentage of Completion Method

6) Completed Contract Method

Matching Principle

The matching principle is a way of setting the expenses of a company next to their respective revenues. Once you use one of the above revenue principle methods, then match up the incurred expenses during the same period that the revenue was recognized in the company. But by doing this, the company establishes that the income for the period revenue has been recognized.

Disclosure Principle

Lastly, the disclosure principle states that a company’s financial statements need to and should contain enough information to outsiders so that they can make well informed decisions about a company. In most cases this is pretty straightforward, but for some policies, issues, and uncommon transactions the way in which a company should disclose information can become unclear. Include the following to cover the majority of issues and events within the financials as to avoid misleading investors.

1)  Significant Accounting Policies

2) Probable Losses

3) Accounting Changes

4) Subsequent Events

5) Business Segments

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accounting principles 5, 6, and 7, revenue principle, matching principle

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accounting principles 5, 6, and 7, revenue principle, matching principle

 

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