Literature review of percentage of completion

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Once upon a time, contractors essentially chose between a contract-complete method or a percentage-of-completion method for recording revenue. More recently, the new ASC revenue recognition standards have ushered many changes and raised as many questions. Topic provides two acceptable methods for revenue from construction contracts: completed contract or percentage of completion. Where reliable estimates are possible, ASC recommends that contractors use the percentage-of-completion method.

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Percentage of Completion Method Definition

Percentage of completion method is a basis for revenue recognition in long-term construction contracts which span over more than one accounting periods. In case of long-term contracts, accountants need a basis to apportion the total contract revenue between the multiple accounting periods. Percentage of completion method provides one of those bases, other being full-contract method. It determines revenue recognized in one accounting period in accordance with the following formula:.

Percentage-of-completion method

FLEXIBLE BUDGET A flexible budget, which is also known as variable budget as the name typifies flexes for alteration in the volume of operations and it is calculated using the actual activity level for a particular period not the budgeted sales multiplied by the standard cost per unit. It uses the incomes and expenses generated in the recent production as a baseline and measures how the income and expenditures will vary based on the changes in the output. In addition, it is established after a period to foretell both the successful and the unsuccessful areas for the forthcoming accounting period. My Accounting Course, n. To accomplish this in the real world, the managers carefully identifies the fixed and the variable cost and then compares.
The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period. This is in contrast to the completed contract method , which defers the reporting of income and expenses until a project is completed. The percentage-of-completion method of accounting is common for the construction industry, but companies in other sectors also use the method.
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