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Simple English definitions for legal terms
percentage-of-completion method
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A quick definition of percentage-of-completion method:
The percentage-of-completion method is a way of keeping track of how much work has been done on a project and how much money should be recognized as revenue. It means that revenue is recognized gradually as the project is completed. This is different from other accounting methods that only recognize revenue when money is received or expenses are paid out. It helps companies to accurately report their financial status and make better business decisions.A more thorough explanation:
The percentage-of-completion method is an accounting method used to determine revenue recognition gradually during the completion of a contract. This means that revenue is recognized as the work progresses, rather than waiting until the project is complete.
Let's say a construction company is building a new office building for a client. The total contract price is $10 million, and the project is expected to take two years to complete. After the first year, the company has completed 50% of the project, and the client has paid $4 million. Using the percentage-of-completion method, the company would recognize $5 million in revenue for the first year (50% of the total contract price), even though they have only received $4 million in payment.
This method is used to provide a more accurate representation of a company's financial performance over time, rather than waiting until the end of a project to recognize all revenue at once.