In this video, I cover the percentage of completion method. The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period. The percentage of completion method calculates the ongoing recognition of revenue and expenses related to longer-term projects based on the proportion of work completed. Farhat Accounting Lectures can help you understand percentage of completion method.
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Longterm contracts frequently provide that the seller (builder) may
bill the purchaser at intervals, as it reaches various points in the project. Examples of longterm
contracts are constructiontype contracts, development of military and commercial aircraft,
weapons delivery systems, and space exploration hardware. A company satisfies a performance
obligation and recognizes revenue over time if at least one of the following three criteria is met:
1. The customer simultaneously receives and consumes the benefits of the seller’s
performance as the seller performs.
2. The company’s performance creates or enhances an asset that the customer controls as
the asset is created or enhanced; or
3. The company’s performance does not create an asset with an alternative use. In addition
to this alternative use element, at least one of the following criteria must be met:
a. Another company would not need to substantially reperform the work the company
has completed to date if that other company were to fulfill the remaining obligation to
b. The company has a right to payment for its performance complete to date, and it
expects to fulfill the contract as promised.
Therefore, if criterion 1, 2 or 3 is met, then a company recognizes revenue over time if it can
reasonably estimate its progress toward satisfaction of the performance obligations. That is, it
recognizes revenues and gross profits each period based upon the progress of the construction—
referred to as the percentageofcompletion method.
Alternatively, if the criteria for recognition over time are not met, the company recognizes
revenues and gross profit at a point in time, that is, when the contract is completed. This
approach is the completed contract method.