How To Calculate Revenue Using Percentage Of Completion Method

Based on the percentage of completion calculated using cost date we determine than revenue of 62 5 million has been earned 31 25 multiplied by 200 million total contract value.

How to calculate revenue using percentage of completion method. The cost to cost method provides for proportional recognition of revenue to costs. The following is a three step method for the contractor to follow at the end of each accounting cycle monthly or quarterly to calculate the revenue earned and the direct costs of those revenues. For example lets assume a project is going. Percentage completion poc method formula.

The method recognizes revenues and expenses in proportion to the completeness of the contracted project. First take an estimated percentage of how close the project is to being completed by taking the cost to date for the project over the total estimated cost then multiply the percentage calculated by the total project revenue to compute revenue for the period. The percentage of completion schedule calculates the amount of revenue to be recognized for long term construction type contracts. There are other acceptable methods of revenue recognition but the cost to cost method used in this template is one of the more popular.

The percentage of completion method falls in line with ifrs 15 which indicates that revenue from performance obligations recognized over a period of time should be based on the percentage of completion. Overview of the percentage of completion method. At the end of the accounting cycle the contractor should tour the project and calculate the most accurate percentage of completion on that day. The percentage of completion method calculates the ongoing recognition of revenue and expenses related to longer term projects based on the proportion of work completed.

On the other hand based on the engineer s survey the revenue recognized should be 80 million 40 multiplied by 200 million. By doing so the seller can recognize some gain or loss related to a project in every accounting period in which the project continues to be active. Having calculated the percentage of completion the next step is to apply this percentage to the estimated total revenue from the project. The percentage of completion formula is very simple.

Suppose in the above example the project had total estimated revenues of 120 000 then using then percentage of completion method the revenue to recognize is calculated as follows. This mismatch between actual billed revenue and earned revenue will require an adjusting entry but since the percentage of completion method adjusts billed revenue to reflect earned revenue billings are posted to revenues and adjusted later to reflect the correct earned revenue amount. As per the units of delivery method of percentage completion the company can recognize 46 26 650 as revenue in the given financial year. Debit accounts receivable credit sales.