How to Implement the Percentage-of-Completion Method of Accounting

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 amount of revenue reported each year under the contract using the percentage of completion method is determined by multiplying the total estimated contract price times the percentage of completion at the end of the taxable year (completion factor) less any gross receipts reported in the prior tax years of the contract.  For an explanation of its methology, including an example with calculations and journal entries, please see the article, “Percentage-of-Completion Method of Construction Accounting“.

About William Brighenti

William Brighenti is a Certified Public Accountant, Certified QuickBooks ProAdvisor, and Certified Business Valuation Analyst. Bill began his career in public accounting in 1979. Since then he has worked at various public accounting firms throughout Connecticut. Bill received a Master of Science in Professional Accounting degree from the University of Hartford, after attending the University of Connecticut and Central Connecticut State University for his Bachelor of Arts and Master of Arts degrees. He subsequently attended Purdue University for doctoral studies in Accounting and Quantitative Methods in Business. Bill has instructed graduate and undergraduate courses in Accounting, Auditing, and other subjects at the University of Hartford, Central Connecticut State University, Hartford State Technical College, and Purdue University. He also taught GMAT and CPA Exam Review Classes at the Stanley H. Kaplan Educational Center and at Person-Wolinsky, and is certified to teach trade-related subjects at Connecticut Vocational Technical Schools. His articles on tax and accounting have been published in several professional journals throughout the country as well as on several accounting websites. William was born and raised in New Britain, Connecticut, and served on the City's Board of Finance and Taxation as well as its City Plan Commission. In addition to the blog, Accounting and Taxes Simplified, Bill writes a blog, "The Barefoot Accountant", for the Accounting Web, a Sift Media publication.
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4 Responses to How to Implement the Percentage-of-Completion Method of Accounting

  1. Caleb says:

    This is pertaining to the percentage of completion and completed contract method explanation.

    What if in year 2, our estimates of the cost goes up which results in a loss whereas in the first year we have already recognized a gain? How do we journalize those entries in the books under both the percentage of completion method and completed contract method?

    • There are two kinds of losses on contracts: an interim loss or an overall loss for the project.

      Under the percentage-of-completion method, losses in either case are immediately recognized.

      However, under the completed contract method, losses are recognized immediately only when overall losses are indicated.

      If you are referring to an expected overall loss on the entire contract, under the completed contract method, you would simply book the anticipated loss. Under the percentage-of-completion, you would not only have to book the total anticipated loss on the contract but also reverse out the gain previously recorded: that is, the total amount of the journal entry would be the sum of the absolute values of the anticipated loss plus the previously recognized gain.

      The Barefoot Accountant

      Accountants CPA Hartford, Connecticut, LLC

  2. Musa A M says:

    Dear Mr. William Brighenti,

    I read your article on the internet on the caption in thesubject above and I wish to commend your good efforts. However I like you to assistme with a situation currently on hand. Your illustration in the article presenteda situation whereby construction in progress exceed progress billing, if thissituation continue to the end of the project life, how I my suppose to closethe progress billings account. I insert below extract from the article

    “To illustrate the accounting under thepercentage-of-completion method of constructing accounting, assume thefollowing:

    Contract = $100,000

    Total estimated costs = $80,000

    Year 1 costs = $20,000

    Year 1 billings = $30,000

    Year 2 costs = $40,000

    Year 2 billings = $50,000

    During year 1, costs are accumulated in anasset account typically entitled Construction in Process (CIP):

    Construction in Process

    20,000

    Accounts Payable (or Cash)

    20,000

    During year 1, billings are posted to a contraaccount to Construction in Process, often entitled Progress Billings:

    Contracts Receivable

    30,000

    Progress Billings

    30,000

    To compute the percentage of completion, onedivides the costs to date by the total estimated costs:

    % complete = 20,000/80,000 = 25%

    Of course, total estimated gross profit ismerely the difference between the contract price less total estimated costs:

    Total estimated gross profit = 100,000 -80,000 = 20,000

    Gross profit to date is computed multiplyingthe percent complete by the estimated gross profit:

    Gross profit to date = 25% X 20,000 = 5,000

    The following journal entry is made to reflectthe gross profit, revenues and expenses on the contract for year 1:

    Construction in Process

    5,000

    Construction Expenses

    20,000

    Construction Revenues

    25,000

    For year 2, gross profit is derived asfollows:

    % complete = 60,000/80,000 = 75%

    Current year’s gross profit = 75% X 20,000 -5,000 = 10,000

    And the following journal entry is made toreflect the gross profit, revenues and expenses on the contract for year 2:

    Construction in Process

    10,000

    Construction Expenses

    40,000

    Construction Revenues

    50,000”

    Best Regards

    Monsur

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