See Also:
Accounting Principles
Percentage of Completion Method
Installment Method
Point of Sale Method (POS)
Cost Recovery Method
Completed Contract Method Definition
The completed contract method also known as the contract completion method is a form of revenue recognition used for project based accounting such as construction. The completed contract method of accounting records all revenue earned on the project in the period when a project is done.
Completed Contract Method Meaning
The Completed Contract Method of revenue recognition is normally only used in the short-term i.e. projects that last less than a year. Anything over a year and most firms prefer the percentage of completion method because it paints a more realistic picture in the long term. However, for firms that are more conservative the complete contract method becomes appropriate because the revenue will not be recognized until the total cost has been accounted for and all the revenue has been received.
Completed Contract Method Example
The following represents an example to help explain completed contract method accounting:
Bob works for Whistle-at-You Construction Co. (WAY) and has obtained the following information via a contract with a company who is in need of refurbishing some office space. Whistle-at-You believes that they will be able to complete the project in 8 months. WAY uses the completed contract method of revenue recognition when it is dealing with projects that will only lasts under a year. The contract states that the company will pay WAY $5 million upon completion of the project and the estimated costs equal $4 million. At the end of the construction, which ended up being 9 months instead of 8 months, the company pays the $5 million to WAY, but the actual cost for the project amounted to $4.5 million dollars. Because the project is completed Bob will recognize revenue in the amount of $5 million and the actual cost of construction of $4.5 million. Therefore, the income will be correctly stated at $500,000.
Note: If Bob had used the percentage of completion method the company would have had to have made some adjusting entries to try and correct for the extra costs as well as the extended month. This is one major advantage that completed contract method revenue recognition has over the percentage completion method.