Percentage of completion method

Percentage of completion is a method of accounting for long-term projects in which revenue and expenses are recognized based on the percentage of work they have completed during the period. Using the percentage of completion percentage of completion formula method, a contractor recognizes project income and expenses as the project progresses, usually on a monthly basis. So, revenue and costs are estimated across the project’s length or duration during long-term contracts.

This game would not be sustainable, however, as Toshiba Corp. discovered in 2015. The infrastructure unit of the Japanese conglomerate understated operating costs by approximately 152 billion yen ($1.2 billion) between 2008 and 2014. Shortly after the scandal broke, the CEO was forced to resign, and half the Board of Directors stepped down. These differences in the billing amount are recorded as journal entries in the general ledger. They increase or decrease the amount of revenue recognized on the income statement and create an asset or a liability on the balance sheet.

Here’s an Example Illustrating the Percentage Completion Method

Dawn Killough is a writer with over 20 years of experience in construction, having worked as a staff accountant, green building advisor, project assistant, and contract administrator. She shares fundamental green building strategies and techniques in her book, Green Building Design 101. To get an answer to a more difficult question – how to calculate the interest amount of a loan payment knowing an interest rate – check out the IPMT function.

First, collections by the company must be reasonably assured; second, the company must be able to reasonably estimate costs and the rate of project completion. A very common scenario is when you have a total in a single cell at the end of a table. So, let me show you a few simple formulas for calculating a percent in Excel such as a percentage increase formula, a formula to get percentages of a total and more. Carrying out simple mathematics based on the above components can provide the revenue to be recognized for the current period. Though it may not provide exact, realistic figures, this is a possible way to accurately measure the revenue from long-term contracts in the most probable manner.

Further Insights

The process used for this accounting technique is called the percentage of completion (POC) method. When using the percentage of completion method, it’s important for contractors to revise their estimates anytime changes occur on the job. This ensures the accuracy of their accounting calculations, and helps to avoid cash flow challenges.

This means the contractor can recognize half of the total revenue for the project. If the contract is for $120,000, the contractor would record revenue of $60,000 for the period, which would be reflected in their income statement. The remaining cost accounting concepts such as overhead costs are the same. The application of percentage of completion formulas differs from case to case. The completion of project is obtained after the final computation at the end of the project.

Related functions

This can be useful for tracking progress and setting goals for various activities. Cost of goods sold (COGS) makes up a substantial portion of a construction company’s expenses. Of course, reporting income means nothing if you aren’t collecting payments. Regardless of the accounting method your construction business is using, it’s important to take steps to secure your payments on every project. In fact, the above example is a particular case of calculating percentages of a total.

The contract is worth $200 million and the company is expected to complete it in 3 years. In Year 1 the company has incurred an amount of $50 million on the contract and the engineers estimate that in the next 2 years the company is expected to expend $110 million more. Based on the physical progress of the project the engineers also estimate that 40% of the work has been carried out. As you’ve just seen, calculating percentages in Excel is easy, and so is calculating amounts and totals if you know the percentage. This tutorial provides two examples of how to calculate completion percentage in different scenarios. Gain real insight into project cash flows, subcontractor compliance statuses, AP/AR status, and more with custom reporting.