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What is the percentage of the completion method?
The percentage of completion method recognizes all the revenue and profit associated with long-term projects on proportion/percentage of work completed.
In this method, revenue is recognized yearly. Sellers can recognize gain/loss in a project in every accounting year. This method estimates stages of project completion or estimates costs of remaining costs. This method falls in IFRS 15.
The formula for the percentage of completion method is as follows −
Revenue (to recognized) = percentage of completed work * total contract value
The types of the percentage of completion method are as follows −
- Cost to cost method
Percentage of work completed = total expenses incurred (accounting period)/total estimated contract cost
- Efforts expended method
In this method, man hours and machine hours are taken into account to complete the project. Similarly, material consumed is considered as an important requirement for a project.
- Units delivery method
Comparison of units delivered (percentage) to buyer to total units to be delivered under contract, is done under this method.
The steps used in the percentage of completion method are as follows −
- Estimated gross margin = Total estimated contract costs – Total estimated contract revenue.
- Measures the extent of progress (using any above methods).
- Total amount of revenue (recognized) = total estimated contract revenue * estimated completion percentage
- Current accounting period = contract revenue recognized (to date through previous periods) – total amount of revenue
- Cost of revenue earned = (percentage of completion * estimated contract cost) – amount (recognized)
The advantages of the percentage of completion method are as follows −
- Costs and revenue are recognized based on percentage of completion of project.
- Estimates costs and revenue associated in real time.
The disadvantages of the percentage of completion method are as follows −
- Information available (costs and revenue) at the start of the project is less.
- Leads to more fluctuation in books, if the initial estimates are not accurate.
The limitations of the percentage of completion method are as follows −
- It is used only for long term projects.
- It fluctuates from management estimations.
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