What is the method of completion of completion?

Method of completion is a standard accounting practice used for businesses or individuals who conclude contracts that last for several years. This method is most often associated with construction projects that accurately determine the costs and profits within one year after a multi -year contract. This is called the percentage of completion, as it measures part of the already completed project in terms of estimated costs of the whole project and the amount of the contract itself. The performance of this method requires the distribution of costs used in one year by estimated total costs and then multiply this number by the overall estimated gross profit.

It is not uncommon for construction projects to take place over several years, presenting a company to the project. For example, the prices of the material used in construction may change from year to year, or weather complications may cause a delay. These options require an accounting process that takes into account these variables. Method of percentage of completion withTani these variables and the cost and profits of the reported periods.

For example, imagine that a company and concluded a contract that will pay them $ 10,000 in the US (USD) to complete the construction project, while the estimated project costs are $ 8,000. This means that the expected total estimated gross profit of the company is $ 2,000, ie $ 10,000 minus $ 8,000. In one year of this project, the company collects $ 4,000.

In order to achieve the cost of completion, $ 4,000 is divided by an estimated cost of $ 8,000, which is 0.50. This means that the company has spent 50 percent of the total estimated asset for the whole project in this single year. 0.50 is then multiplied by the total estimated gross profit to determine the profits of the company per year. In this example, 0.50 is multiplied by $ 2,000, which means that the gross profit of the SPOThe loss for a given year is $ 1,000.

When using the percentage method, the Company must build its accounting diary to reflect the data used precisely. The construction in the process (CIP) should be part of a book that reflects the costs incurred to the current point. There should also be a Contra account reflecting amount of billing that the company has already issued to its clients. In this way, the magazine will show gross profits, expenses and income for each year of contracts.