What is the 'Percentage Of Completion Method'
The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized yearly as a percentage of the work completed during that year. This is the opposite of the completed contract method, which allows taxpayers to defer the reporting of any income and expenses until a long-term project is completed. The percentage of completion method of accounting is commonly used in construction projects.
BREAKING DOWN 'Percentage Of Completion Method'
The percentage of completion method of accounting requires the reporting of revenues and expenses on a yearly basis, as determined by the percentage of the contract that has been fulfilled. The current income and expenses are compared with the total estimated costs to determine the tax liability for the year. For example, a project that is 30% complete in year one and 45% complete in year two would only have the incremental 15% of revenue recognized in the second year.