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Revenue Recognition: Completed-Contract And Percentage-Of-Completion Method



In the construction industry, two accounting approaches have developed over the years regarding the recognition of revenue. The first approach—the completed-contract method—does not recognize any profit until the construction project is complete. The second approach—the percentage-of-completion method—recognizes profit on a piecemeal basis.

The logic behind the percentage-of-completion method is that both the buyer and seller have obtained enforceable rights. The buyer has the right to require specific performance on the contract; the seller has the right to require progress payments. Thus the facts seem to indicate that a continuous “sale” is in progress.


According to Statement of Position 81-1, the percentage method should be used if estimates of progress toward completion, revenues, and costs are reasonably dependable, and all the following conditions exist:

  1. The contract clearly specifies the rights regarding goods or services to be provided, and the consideration to be exchanged.
  2. The buyer can be expected to satisfy all the contractual obligations.
  3. The contractor can be expected to perform the contractual obligations.


If these conditions have not been met, then the completed-contract method should be used. It should be emphasized that the total profit on the construction project is the same under both methods.

The difference between methods is simply a question of timing—the percentage method recognizes profit little by little over time, while the completed-contract method defers the entire profit until completion.

Let’s go in detail with case examples, its formula, calculation and journal entries……



The Completed-Contract

This method defers all the profit on the construction project until the completion date. During the construction period, all costs incurred are debited to an inventory account called Construction in Process“. This is similar to the Work in Process account used in cost accounting. Billings are debited to Accounts Receivable and credited to an account calledBillings on Construction“. This is not a revenue account since this method does not recognize any revenue or profit until completion. Rather, it is a contra asset to the Construction in Process Account. Finally, at completion, the construction and billings accounts are closed, and the difference between them is recognized as gross profit.

For easier understanding, let’s construct some examples…..



Construction Corporation enters into a contract on January 1, 19A, with the Department of City Development to build a small building for $100,000. The project is estimated to take 3 years. The following information presents the transactions that took place over this time:

Revenue Recognition: Completed-Contract Method

Notice that the final profit is $30,000 ($100,000 ? $70,000). Also notice that the estimate of what the final profit would be changed between 19A and 19B. In 19A it was $35,000 (selling price of $100,000 ? $20,000 of costs incurred so far ? $45,000 of estimated completion costs). In 19B it changed to $30,000 ($100,000 ? $20,000 ? $25,000 ? $25,000). The journal entries for the three years would be as follows:


Completed Contract Method Journal Entry


By the end of 19C, the “billings account” and the “Construction in Process account” appear as follows:


Billing On Construction - Construction In Process


The journal entry in 19C (to close these accounts and recognize profit) would be:


[Debit]. Billings on Construction = $100,000
[Credit]. Construction in Process = $70,000
[Credit]. Income on Construction = $30,000


The information given regarding estimated completion costs was not needed in this problem. However, it is relevant if the percentage-of-completion method is used instead of the completed-contract method.

Notes: The account Billings on Construction is a contra to the construction account and is shown on the balance sheet as such. If its balance is less than the balance in the construction account, the net amount is shown as a current asset; if it is more, the net amount is shown as a current liability.



In the previous example, the balance sheets for 19A and 19B would appear as follows:

Balance Sheet - 2

Note: The income statements for 19A and 19B would not show any revenue or profit since these items are deferred until completion.



If in 19X1 Corporation X has construction costs of $50,000 and billings of $38,000, its balance sheet would show:

Balance Sheet 3


The Percentage-Of-Completion Method

This method recognizes a portion of the gross profit each year based upon the following formula:

Recognized rofit:

Profit Recognition Formula


The entries each year would be the same as under the completed-contract method, with one additional annual entry to recognize profit. This entry debits the construction account (the profit is placed “into” the inventory) and credits a profit account.



Let’s use the same information as in Example-1. The journal entry in 19A for profit recognition is:


[Debit]. Construction in Process = $10,769
[Credit]. Income from Construction = $10,769


The calculation is:

Profit Recognition - Its Calculation

At this point, the expected profit is $35,000 (selling price of $100,000 – past costs of $20,000 – future costs of $45,000).


The $10,769 would be shown on the 19A income statement. In 19B the profit recognized is:

REcognized Profit Calculation

Notice that the total expected profit has changed from $35,000 to $30,000 due to changes in anticipated costs. This happens often in the construction industry.


The $30,000 total expected profit is computed as follows:

Expected Profit Computed


The 19B income statement would show profit of $8,517 and the journal entry would be:

[Debit]. Construction in Process = $8,517
[Credit]. Income from Construction = $8,517


While in 19C:

Profit Recognition Calculation


A journal entry would be made for this amount. An examination of the accounts at the end of 19C reveals the following:


Construction In Process Account


Notice that the balances of these two accounts are equal (at $100,000) under this method. This is because the construction account contains both cost and profit.


One final journal entry would be made at the end of 19C to close these two accounts:


[Debit]. Billings on Construction = $100,000
[Credit]. Construction in Process = $100,000


Note: If at any time during the construction period it is estimated that a loss will occur on the project (because the estimated total costs are expected to be higher than the selling price), it should be recognized by a debit to a loss account and a credit to the inventory account. Furthermore, if in previous years profit was recognized under the percentage-of completion method, it should now be nullified via a reversing entry.


Next Example:

A company used the completed-contract method for a 5-year construction project. Thus no profit would be recognized until the fifth year. During the third year the company realizes that the total project will result in a net loss of $50,000. The company should immediately make the following journal entry:


[Debit]. Loss on Construction = $50,000
[Credit]. Construction in Process = $50,000


One Final Example:

In the previous example, assume the company used the percentage-of-completion method and recognized profit of $10,000 and $20,000, respectively, in the first 2 years. In the third year, upon discovery of the $50,000 loss, an entry must be made to both recognize this loss, and to nullify the previous profit. The journal entry would be:


[Debit]. Loss on Construction = $80,000 *
[Credit]. Construction in Process = $80,000

Note: *10,000 + 20,000 + 50,000



  1. joan

    Dec 18, 2008 at 9:32 pm

    A construction contractor incurrs an unusual large expense of $1.8 million due to “accounting change in long term contracts” on its accrual method tax return. The balance sheet shows a similar jump in “Billings in excess of costs and est earnings” of $1.6 million. Is it possible from this info to guess what the accounting change was and the affect on tax?

  2. Putra

    Dec 19, 2008 at 1:34 pm

    Hi Joan,

    What an analytical question you spot here. I Love it!

    Unfortunately you revealed only two items here (i.e.; costs+expenses & Billings) which is an off-set indeed.

    For the time being, it seems that the contractor uses “completed-contract method”. I don’t see any indication that the exteremely jump up on cost+expenses & billings as caused by any accounting change.

    However, you are invited to bring more information for more analyses.


  3. Mervyn

    Mar 15, 2009 at 2:15 pm

    If total billings for a contract started in the current year, and in process at the end of the year, equals $1,767,ooo and current receivables and retainage receivable at the end of the year are #324,568 and $176,700 respectively, what are the revenues to be recognized under the following methods:
    A. Cash Basis_________________
    B.Accrual Basis________________
    C.Completed Contract Method_________________
    D.Percentage of Completion___________________


  4. Christina

    Jul 3, 2009 at 1:55 pm

    I am a little confused instead of making all those asset cip entries why nmot do this

    contract 100,000
    Cost 70,000
    Profit 30,000

    Year 1 25% completed ( 100,000*25%) = 25,000.00 so far 20,000.00 in cost do

    Debit cost of goods sold for 20,000.00
    credit cash or accounts payable 20,000.00

    then debit Accounts Receivable for 25,000.00
    credit construction revenue 25,000.00

    The income statement will the be 25,000-20,000=5,000.00 profit for the year.

    Whats wrong with my entry what is the need for Works in progress when you can just do it this way I have been doing it for years.

    Thank you.

    • Ronald

      Mar 22, 2012 at 1:16 pm

      Hi Christina,

      The WIP is just 25% from which you are not suppose to recognize any revenue from the contract.

      From the Journal entry also, the revenues dat you will receive either profit or loss is taken to the profit and loss accounts.

      Pliz reply me Madam if you are convinced or not.


  5. jean

    Mar 21, 2010 at 4:59 am

    Hi Im just new accounts assstant for a construction company ang I can’t do this percentage of completion as a result to negative net income.

    what should i do, if there is a retention fee and recovery from advances.??

  6. jean

    Mar 21, 2010 at 5:04 am

    ALso what if:
    5,000,000- contract price

    as per invoice to client:
    Inv 1- 50,000- Work done
    150,000- wprk variation
    5000- retention
    5000- recovery from advances
    NEt Rcvble- 190, 000

    Inv 2- 50,000- workdone
    320,000- work variation
    5000-retention fee
    5000- advances from recovery
    Net recevble- 170,000

    How can i do this using percentage of completion???
    waiting for ur answer..

  7. John

    Apr 12, 2010 at 3:01 am

    The accounting entries in the examples would result in the income statement showing only a line for the profit recognised without corresponding revenue and cost entries. It would be kind of wierd, isn’t it?

  8. TAks

    Jun 5, 2010 at 5:14 am

    Hey…I have joined a new construction as an accountant, my company doesn’t maintain accounts as of now and wants me to set up a kind of accounts department for em… Am new in business(graduated last year) and has no prior accounting experience in any field as this is my first job.

    Would like to know from you the basics, I mean how should I start to maitain accounts for em as they have 2 projects going on side by side….

    though the info above have helped me a lot….need further assistance…


  9. Carl

    Aug 28, 2010 at 1:28 pm

    Is there a method to convert completed contract to percentage of completion for construction accounting? If so, where can I find this method.



  10. Benit

    Jan 31, 2011 at 6:23 pm

    Could you please help me with it prolem
    Using the following data for the Michael Ryan Construction Company, calculate the annual
    income of the company using:
    1. Percentage-of Completion Method
    2. Completed-Contracts Method
    Project A Project B Project C
    Total Contract Amount $820,000 $1,400,000 $100,000
    Cash Expenditures to 31?Dec?20X1 $730,000 $750,000 $600,000
    Total Expenditures to 31?Dec?20X1 $760,000 $800,000 $600,000
    Estimated Expenditures to Complete $0 $775,000 $300,000
    Total Estimated Expenditures $760,000 $1,525,000 $900,000
    Billings through 31?Dec?20X1 $800,000 $900,000 $750,000
    Cash Collections through 31?Dec?20X1 $780,000 $850,000 $700,000
    Total G&A Expenses $150,000

  11. Alish M.

    Jun 24, 2011 at 12:46 am

    I have a doubt regarding your 1st example under ‘The Completed Contract’ Method. In that example, the total projected cost is $ 70000. But in the year 19A, the firm has incurred cost of $ 20000, hence leaving a balance of $ 50000 as the projected construction costs which subsequently is incurred $ 25000 in two years. But in the example you have stated above shows the constructed cost balance as $ 45000………. Please advise…….

  12. Ronald Joseph

    Jul 9, 2012 at 4:39 pm

    Tony Construction Company has consistently used the percentage-of-completion method. On January 10, 2010, Tony began work on a $5,000,000 contruction contract. At the inception date, the estimated cost of construction was $ 4,500,000. The following data relates to the progress of the contract:

    Income recognized at 12/31/10 $ 600,000
    Cost incurred at 01/10/10 through
    12/31/11 3,500,000
    Estimated cost to completeat
    12/31/11 1,200,000

    How much income should Tony recognize for the year ended December 31, 2011?

  13. Ronald Joseph

    Jul 9, 2012 at 5:02 pm

    Matt Construction Company has consistently used the percentage-of-completion method of recognizing income. During 2010, Matt entered into a fixed price contract to construct an office building for $10,000,000. Information relating to the contract is as follows:

    At December 31
    2010 2011
    Percentage-of-compltion 20% 60%
    Estimated total cost
    at completion $7,500,000 $8,000,000
    Income recognized
    (cumulative) 500,000 1,200,000

    What is the contract cost incurred during 2011

  14. Alemayehu Gebre

    Jul 26, 2012 at 3:34 am

    I have got relevant information from this web.

    Thanks a lot.

    With regards,
    Alex G

  15. Jeff

    Mar 28, 2013 at 8:42 pm

    I have a client that submits monthly financial statements based on the percentage of completion method of accounting. This month operating profit was positive. However there is an entry below labeled WIP Adjustments and this month it is a large negative amount, throwing the company into a loss. Every month this WIP Adjustment entry has an amount and some times the number is a positive entry to earnings. Can you explain what this WIP adjustment entry is every month.???

    Thanks Jeff b….

  16. Neal

    Mar 26, 2015 at 12:11 am

    I am looking at reviewed financial stmts and tax returns for a company. Financials are done on % completion basis and tax return on Contracts complete.
    A schedule show end of year contracts completed gross income of $2.642 million the Tax return shows gross earnings of $2.366million. Where would the 276k difference be found in the tax return?

  17. shanavas

    Apr 27, 2016 at 8:43 pm

    Suppose contact price 100000
    Estimated cost 80000
    Cost to date 20000
    Billings to date 25000
    Bill Certified by consultant 20000
    Project tenure 5 yrs

    What should be booked as revenue in this condition , as per percentage completion we can know revenue is 25000 since the consultant have approved 20000 as revenue what should we book revenue in our books ie 20000 or 25000, if we book 25000 as revenue how will we justify auditors since the certification is only for 2000/

    Please help

  18. Leencoo

    Oct 16, 2017 at 12:44 pm

    How can I calculate gross profit recognized in a contract worthy of 900000 that have to be completed in 3 years?

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