Many contractors are probably familiar with the term “percentage of completion basis accounting”, and you may have first heard it from your surety company asking you to change your accounting from either accrual or cash basis to percentage of completion basis. A lot of contractors simply have their CPA make the appropriate adjustments, but they never fully understand what percentage of completion accounting is. This can be extremely valuable not only for communicating with your surety company but also to run your business. Watch our latest video to learn more.
What we have on the screen is a sample financial statement, and you’re looking at the income statement. So you can see we have the revenue, cost, gross profit from jobs, then operating expenses also called general and administrative expenses or G&A, other income, and net income. What we’re going to walk you through is how the revenue, cost, and gross profit are derived using percentage of completion basis accounting.
To do that will scroll down to the contracts in progress schedule. If you’re not familiar with the contracts in progress schedule, it’s basically a list of your jobs that are in progress as of the financial statement date. The first three columns show the revised contract amount, the current estimated cost for each job, and the estimated gross profit.
Percentage of completion accounting is often referred to as cost the cost, because in order to determine how much revenue is earned on each project, it takes the cost incurred, which you can see here in this first job is $4.2 million, and it divides it by the total estimated cost of $6.5 million. That is showing that 64.9% of the costs have been incurred. Therefore, with percentage of completion basis accounting, you will earn 64.9% of the revenue.
Those numbers that I just showed you are for the entire contract, and in order to figure out how much of that revenue, cost, and gross profit is for the current year, you have to subtract whatever was earned on your prior year work in progress schedule.
You do the same thing for completed contracts which are normally shown on a separate schedule. Here you can see this first contract for $7.6 million, $6 million was earned in the prior year, so $1.6 million of the revenue goes into this year.
So when you add the total revenue, cost, and gross profit from both your work in progress and completed contract schedule, that ties into your schedule of earned contract revenue which then ties into the income statement.
So there you have percentage of completion basis accounting.