The completed contract method is an accounting method used to recognize revenue from long-term construction projects. Under this method, revenue and expenses are not recognized until the project is completed. This is in contrast to the percentage of completion method, which recognizes revenue and expenses as the project progresses.
The completed contract method is generally used only for large construction projects that span multiple accounting periods. For example, a building that takes three years to construct would likely be accounted for using the completed contract method.
The main advantage of the completed contract method is that it simplifies the accounting for long-term construction projects. This is because all revenue and expenses are recognized in the period when the project is completed. This makes the financial statements for construction companies using this method less complex.
The main disadvantage of the completed contract method is that it can delay the recognition of revenue and expenses. This can make it difficult to track the financial performance of construction projects on a timely basis.
The completed contract method is a permissible accounting method under generally accepted accounting principles (GAAP).
What happens after the contract is completed?
Assuming the contract is completed and all relevant parties have signed off on it, the next step is to close out the project in the accounting system. This means creating a final invoice for the customer (if applicable), recording any final revenue and expenses, and ensuring that all project-related assets and liabilities have been properly accounted for. Once the project is closed out, the accounting team will produce a final report detailing the financial results of the project. This report will be shared with management and used to inform future decision-making.
What is the difference between percentage-of-completion method and completed-contract method?
The main difference between the percentage-of-completion method and the completed-contract method is that the former recognizes revenue and expenses as work is completed, while the latter recognizes revenue and expenses only when a project is completed.
The percentage-of-completion method is considered more accurate because it matches revenue and expenses in the period in which they are incurred. This provides a better picture of a company's financial health. The completed-contract method, on the other hand, can result in large swings in income from period to period, depending on when projects are completed.
What are contract methods? Contract methods are the various ways that an organization can enter into contracts with other organizations or individuals. The most common contract method is through a formal bidding process, where potential contractors submit bids to the organization in order to be considered for the contract. Other contract methods include sole source contracts, in which the organization contracts with a single contractor without a competitive bidding process, and letter contracts, in which the organization and contractor agree to the terms of the contract in a letter. Is completed contract method accrual? Yes, the completed contract method is an accrual method. This means that revenue is recognized when the contract is completed, not when the work is performed. What is it called when a contract is signed? The term "contract" is used to refer to a legally binding agreement between two or more parties. A contract can be written, oral, or implied by the actions of the parties involved.