In completed contract method, the revenue and expenses are recognized when the project is complete. This method of accounting does not provide accurate information about the construction firm's financial condition as the recognition of revenue and expenses are deferred till the completion project rather than in the periods when the revenues are billed to date or the costs are incurred to date. The revenue recognized to date for the project at any stage within the project duration is zero, as the project is not complete. This method of accounting can be used for construction contracts having higher uncertainty about the construction cost and revenue until the completion of the project, involving higher financial risks in the business. Further completed contract method causes large fluctuations in the profit as the cost and revenue are not recognized till the completion of the project.

Example -1

The following table presents the information about the financial data of a construction project.

Calculate the revenue to date for the project using different methods of revenue recognition.

Solution:

Cash method

By using the data from above table, revenue to date for the project using cash method is calculated as follows;

Accrual method

The revenue to date for the project by using accrual method is calculated as follows;

Percentage-of-completion method

For calculating the revenue to date by using percentage-of-completion method, first the percentage of work that is complete is calculated.

Total estimated cost at completion is equal to costs incurred to date plus estimated or forecasted cost to complete.

The revenue to date for the project is now calculated by multiplying the contract amount with the percentage of completion and is given by;

Now gross profit to date is calculated by subtracting costs incurred to date from revenue to date and is given by;

Completed contract method

By using completed contract method, revenue to date for the project would be zero as the project has not yet been completed.