Percentage-of-completion method

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Percentage of completion (PoC) is an accounting method used for long‑term contracts to recognize revenue and profit as work progresses, instead of waiting until the project ends. It is an alternative to the completed‑contract method.

How it works
- Revenues and gross profit are recognized each period based on the project’s progress (costs incurred to date relative to total estimated costs).
- Costs to date plus recognized profit are kept in an asset called construction in progress; progress billings are kept in a liability called billing on construction in progress. They are not treated as inventory.
- If a loss is expected on the contract, the full loss is recognized immediately in the period it is estimated.

Key rule
- Percentage complete = costs incurred to date / total estimated costs.
- Revenue recognized to date = percentage complete × contract value. If estimates change, revenue is adjusted to reflect the new percentage.

Simple example
- Total contract value: 12,000; total estimated cost: 10,000; project duration: 2 years.
- Year 1: costs incurred 3,000 → 30% complete → recognize 3,600 revenue (30% of 12,000).
- End of Year 2: estimates change to 11,000; cost to date = 5,500 → 50% complete → cumulative revenue 6,000; year 2 revenue = 2,400.
- If a total loss of 3,000 is expected, recognize that loss in the period it’s estimated (adjusting costs and profits accordingly).

Balance sheet note
- The gross amount due from customers for contract work is shown as an asset, and the gross amount due to customers is shown as a liability.