Excel Tutorial: How To Calculate Percentage Of Completion In Excel

Liz has 11 years of experience in public accounting where she has assisted companies through all phases of business development from inception to dissolution. Liz has written extensively for the Pennsylvania Institute of Certified Public Accountants and been featured in podcast and video presentations on their platform. When project costs are incurred each period, they must be properly capitalized based on the percentage completion.

Percentage of completion method provides one of those bases, other being full-contract method.
This is crucial in case of any disputes or legal issues that may arise during the project.
Most construction companies earn revenue and pay job costs throughout the duration of each project.
The method is in accordance with the matching or accruals concept of accounting, and ensures that the costs incurred on the project are matched to the revenues arising from that project.
Using the percentage of completion method, it’s almost as if you have a scoreboard to keep track of all the progress made so far.
The output method looks at the amount of product produced as a part of the project and how that compares to the expected amount of product to be produced.

How Do You Calculate the Percentage of Completion?

In this blog section, we’ll explore some alternative methods for construction contracts and provide insights from different points of view. It ensures legal compliance, effective project management, clear communication, and easy auditing. By following best practices, you can ensure that you are keeping accurate records and avoiding any disputes or legal issues that may arise during the project.

Formulas used

The cost-to-cost method is widely used for recognizing revenue and expenses in long-term contracts. This percentage of completion method compares the total costs incurred in the project to date with the total estimated costs for the entire contract. It calculates the percentage of completion and recognizes revenue and https://www.bookstime.com/ expenses accordingly. The percentage of completion method is advantageous because it provides a more accurate picture of the financial progress of long-term construction projects. It allows companies to recognize revenue and expenses as work progresses, which can help them manage their cash flow more effectively.

Each method of the percentage of completion method has its specific application depending on the project’s characteristics and contract terms.
Most commercial contractors — both general contractors and specialty contractors — use the percentage of completion method to report their income.
Percentage of completion (PoC) is an accounting method of work-in-progress evaluation, for recording long-term contracts.
Percentage of completion method is a basis for revenue recognition in long-term construction contracts which span over more than one accounting periods.
The completed contract method is another revenue recognition method used in the construction industry.

Manual Formula to Calculate Percentage of Completion

You can use a few different methods to calculate POC, although the most commonly used approach is the cost-to-cost method.
If that all sounded like a lot to wrap your head around, don’t worry – we’ll walk through some real-world examples to explain just how this method of accounting works.
The output method compares the results achieved till date to the total expected results of the contract.
These differences in the billing amount are recorded as journal entries in the general ledger.
Once you know the revenue amount to report, you’ll need to adjust your income at the end of the year with a journal entry presented below.
This means the contractor can recognize half of the total revenue for the project.

The percentage of completion method is an accounting method in which the revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period. This is in contrast to the completed contract percentage of completion calculation example method, which defers the reporting of income and expenses until a project is completed. The percentage-of-completion method of accounting is common for the construction industry, but companies in other sectors also use the method.

Alternative Methods for Construction Contracts

To calculate the percentage of completion for a project, there are three indicators contractors can use.
Calculate the current year costs to be reported by multiplying the total estimated costs by the progress percentage.
The calculator will correctly handle the decimal values to compute the percentage.
If you have accurate direct labor hours, you can also use the efforts-expended method to calculate POC, though it is rarely used.
However, while FASB and IASB have placed certain requirements on how you can recognize revenue, the IRS allows for different methods, including the percentage of completion method.
Liz has 11 years of experience in public accounting where she has assisted companies through all phases of business development from inception to dissolution.

An analyst would learn that changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined by the company. The percentage of completion method is a valuable accounting method for the construction industry and other sectors dealing with long-term contracts. The percentage of completion method calculates the ongoing recognition of revenue and expenses related to longer-term projects based on the proportion of work completed.

Income Recognition

This can be used to represent the percentage of completion by assigning different visual styles to cells based on the percentage value they contain. For example, you can use a color scale to visually represent the progress, with cells turning from red for 0% completion to green for 100% completion. Staying on top of it can be an immense challenge, especially when dealing with large projects, various phases, and change orders. If your estimates are wildly inaccurate, numbers will skew, resulting in a barrage of adjustments. Construction accounting brings a different set of rules when compared to more traditional styles of accounting.

Cost-To-Cost Approach

However, a specialized method is needed specifically for long-term contracts, and this specialized method would generally be the PCM. However, by utilizing the percentage-of-completion accounting method, companies can systematically allocate revenues and expenses over the course of long-term projects. If you’ve worked on long-term jobs that stretch out over months, you know just how difficult it can be to keep up with income and expenses as the job progresses. It’s easy to find yourself in a position where you’ve overbilled or underbilled, especially on projects that have gone on longer than you might have expected.

There are two main conditions for the use of the percentage of completion method. First, collections by the company must be reasonably assured; second, the company must be able to reasonably estimate costs and the rate of project completion. Stored materials, not representing completed work, require separate treatment in revenue recognition. To calculate the percentage of work completed in the current accounting year, subtract the percentage of work completed up to the last accounting period from the cumulative percentage. The ability to create dependable contract estimates may be impaired when there are conditions present that are not normally encountered in the estimating process. Examples of these conditions are when a contract does not appear to be enforceable, there is litigation, or when related properties may be condemned or expropriated.

Everything You Need To Build Your Accounting Skills

The total percentage of costs that have been incurred is the percentage of completion for the project. This percentage is multiplied by the total contract amount to determine the revenue to recognize during the period. A unit price contract is where the contractor is paid based on the quantity of work completed.

Step-by-step guide on applying conditional formatting in Excel

As a result percentage of completion is almost always the best route to take, with two significant exceptions. Keeping a close eye on job progress – month by month – helps those in charge of the money to make sure everything is in line. The goal is to verify that financial statements accurately back up real performance to date. Having calculated the percentage of completion, the next step is to apply this percentage to the estimated total revenue from the project. When it comes to managing your accounting for your small business, Skynova is here to make the entire process more simple and straightforward. Businesses interested in using the percentage of completion method will find there are a few options for calculating this accounting measure.