Question

What are the two basic methods of accounting for long-term construction contracts? Indicate the circumstances that determine when one or the other of these methods should be used.

Answer 1

The two basic methods of accounting for long-term construction contracts are the Percentage of Completion Method and the Completed Contract Method. The choice between these methods depends on the nature and complexity of the project, the degree of certainty in estimating costs and progress, and the regulations of accounting standards.

Step-by-step explanation:

The two basic methods of accounting for long-term construction contracts are the Percentage of Completion Method and the Completed Contract Method.The Percentage of Completion Method recognizes revenue and expenses proportionally over the life of the contract. It measures the progress of a project and recognizes revenue and expenses based on the percentage of work completed.

The Completed Contract Method recognizes revenue and expenses only when the construction contract is completed. This method is used when it is difficult to estimate the completion or when the contract spans over a long period of time.The choice between these methods depends on the nature and complexity of the project, the degree of certainty in estimating costs and progress, and the regulations of accounting standards.