What Is a Percentage-of-Completion Method?

The percentage-of-completion method recognizes revenue and costs based on the percentage of completion. This method is used for long-term projects that require a contract, and the completed part, revenue and costs can be reliably estimated.

Percent complete

The application of the percentage-of-completion method is how to confirm contract revenue and expenses based on this method, which specifically includes two steps.

(1) Choose the method suitable for the enterprise to determine the progress of the contract completion. Generally, for construction contracts where the contract workload is easy to determine, such as road engineering, earthwork excavation, masonry engineering, etc., the enterprise can determine the completion progress by using the proportion of the contract workload that has been completed to the estimated total workload of the contract. But in practice, most

Percentage completion method refers to the method of confirming revenue and expenses according to the completion progress of the labor service transaction. Under this method, the confirmed labor service income amount can provide useful information about the labor service transaction and its performance in each accounting period.

The enterprise shall, on the balance sheet date, multiply the total labor service income by the progress of completion and deduct the amount of labor service income accumulated in the previous accounting period after deducting the labor service income. The amount after the labor cost has been confirmed in the accounting period is accumulated and carried forward to the current labor cost. Formulated as follows:

Labor service income recognized in this period = Total labor service income * Completion progress-Accumulated labor service income accumulated in previous accounting periods

Cost of labor services recognized in this period = Estimated total cost of labor services provided * Completion progress-Accumulated labor services costs accrued in previous accounting periods

In the case of using the percentage-of-completion method to confirm the income from providing labor services, the enterprise shall determine the amount of labor services income calculated according to the calculation:

Borrowing: accounts receivable and other subjects

Loan: labor costs

Example: Company A accepted an equipment installation task on December 1, 2007. The installation period was 3 months. The total contract revenue was 300,000 yuan. By the end of the year, the installation fee had been paid in advance of 200,000 yuan, and the actual installation cost of 140,000 yuan (Assuming all the installer's salary), it is estimated that 60,000 yuan will still occur. It is assumed that Company A determines the completion progress of labor services based on the proportion of the actual costs incurred to the estimated total costs, without considering other factors. The accounting of Company A was as follows:

Completion percentage in 2007: 140,000 / (140000 + 60000) x100% = 70%

Revenue to be recognized: 300000x70% = 210000

The premise of using the percentage-of-completion method to confirm contract revenue and expenses is that the results of a construction contract can be reliably estimated at the balance sheet date. Only when the results of the construction contract can be reliably estimated, the contract revenue and expenses can be confirmed using the percentage of completion method. Conversely, the contract revenue and expenses cannot be confirmed using the percentage of completion method.