Unlike the percentage of completion method, where the estimated revenues for each period are accounted for based on the percentage of contract performance, the completed contract method shifts the revenue from the contract. However, even the method of the concluded contract does not delay the recording of the associated costs and expenses. For example, suppose Build-It Construction Co. charges the owner for the work completed so far with a $12,000,000 contract. They debit their A/R account as usual. However, instead of crediting an income account, they credit a liability account that they can call “progress statements.” When it comes to reporting income from their projects, contractors usually had a few options: when they get paid, when they set up, and when they`re done. The latter option is commonly referred to as the “closed contract method,” and while it may seem like one of the simplest methods available, it has its own pros and cons – as well as new wrinkles due to updated product accounting standards called “ASC 606.” Metro Structures, Inc. is a diverse assemblage. On January 1, 2011, the company received a 3-year contract to build a downtown bus lane at a total cost of $300 million. The total turnover and the total gross profit, which are recorded by both methods, are the same. The methods differ in the distribution of sales and gross profit between periods. Here is an example to explain the accounting policy of contracts concluded: The contract concluded method is one of the methods by which the business unit decides to defer the recognition of its revenues and profits until the completion or completion of the project, and generally business organizations use these methods when they have doubts about the recovery of their debts. XYZ Construction Company receives the order to urgently build a warehouse for Strong Product Ltd.

because the company does not have a warehouse to store the products. XYZ management expected to complete the entire project in 3 months and decided to apply the completed contract method. Now suppose Jones Realty goes bankrupt and breaks the contract. There is no longer a jones Realty to take control of the performance obligation – or pay for it! Avoiding the “ghost income” of this situation is one of the reasons why it is good that they do not immediately record their collections as income. However, in this case, Build-It should be able to complete the property and hand it over to another buyer. And it shows another reason why instant detection may suit them. Once they do, their costs and revenues will move from the balance sheet to their income statement. If the contracts are so short-term that the results reported under the completed contract method and the percentage of completion method would not vary significantly. This is the concept of revenue recognition where all revenues and profits associated with the project are not recorded until the project is completed or completed. Primarily, this method is used when a company is unsure of the collection of customer contributions under the contract. With the contract method concluded, revenues and expenses are only recognized at the end of the contract. Journal entries are as follows: A contractor records income from a performance obligation at a given time when one of the following conditions is met: The method of the contract concluded has certain advantages for some contractors.

On the one hand, it allows entrepreneurs to defer their income for tax purposes. If a project does not end until the following year, the company will not have to pay taxes on that income that year. .