Legal Definitions - completed-contract accounting method

The completed-contract accounting method is a specific way businesses record their income and expenses for long-term projects or contracts. Under this method, a company does not recognize any revenue, costs, or profits associated with a project until the entire contract is fully finished and formally accepted by the client.

This means that throughout the duration of the project, even as work progresses and expenses are incurred, no financial impact from that specific contract is reported on the company's income statement until its completion. All costs are accumulated on the balance sheet until the project is done, at which point the full revenue and all accumulated costs are recognized simultaneously, revealing the total profit or loss for that contract.

• Example 1: Custom Yacht Builder

  Imagine a specialized shipyard that builds bespoke luxury yachts. A client commissions a unique yacht that will take two years to design and construct. The shipyard uses the completed-contract accounting method for this project.

  How it illustrates the term: For the entire two-year construction period, the shipyard would not report any revenue or profit from this specific yacht on its financial statements. All the costs incurred during those two years—for materials, labor, design, and testing—would be accumulated. Only when the yacht is fully built, sea-trialed, delivered to the client, and final payment is received at the end of the second year would the shipyard recognize the full revenue from the sale and all the associated costs, thereby calculating the profit or loss for that yacht build.

• Example 2: Large-Scale Infrastructure Project

  Consider a construction company awarded a contract to build a new bridge, a project expected to last three years. Due to the complexity and potential for unforeseen challenges, the company opts for the completed-contract method.

  How it illustrates the term: During the three years of construction, the company would not record any portion of the bridge's contract value as revenue, nor would it report any profit or loss related to the bridge. All expenses for labor, materials, equipment, and subcontractors would be tracked and accumulated. Only after the bridge is entirely finished, passes all inspections, is opened to traffic, and is formally accepted by the commissioning authority would the company recognize the total revenue from the contract and all the accumulated costs, thereby reflecting the project's financial outcome on its books.

• Example 3: Bespoke Industrial Equipment Manufacturer

  A company specializes in designing and manufacturing highly customized, one-off industrial machinery for specific factory needs. A client orders a unique automated assembly line that will take 15 months to engineer, build, and install.

  How it illustrates the term: Throughout the 15-month process, the manufacturer would not recognize any revenue or profit from this specific assembly line. All costs associated with its design, component procurement, fabrication, assembly, and on-site installation would be gathered. The full revenue from the sale and all the accumulated costs would only be recognized on the company's financial statements once the assembly line is fully operational, tested, and formally accepted by the client at their factory.