Final answer:
The percentage of completion method is used in accounting to recognize revenue and expenses of long-term projects based on the project's progress. It can be calculated by comparing costs, measuring work, or using labor hours relative to the total estimated figures for the project.
Step-by-step explanation:
The percentage of completion method is a method used in accounting to recognize revenue and expenses on long-term projects according to the degree of completion of the project. This is in contrast to the completed-contract method, which only recognizes revenue and expenses when a project is completely finished.
To calculate the percentage of completion, you can use the following formula: (Costs Incurred to Date) / (Total Estimated Costs) × 100. This gives you the percentage of the project that has been completed. Once you have the completion percentage, you can recognize revenue and expenses proportional to that percentage.
Three ways to determine the percentage of completion include:
- Using costs incurred to date in relation to total estimated costs.
- Measuring the work performed, such as physical completion or milestones reached.
- Using labor hours expended to date versus total estimated labor hours for the project.
For instance, if a construction project has incurred $250,000 in costs out of a total estimated cost of $1,000,000, the percentage of completion would be 25%. This percentage can be used to determine revenue recognition for the period in question.