Completed contract method

Definition

Completed contract method is a revenue recognition principle where revenue and expenses are recorded only when a long-term project is completed. This method is often used for projects with unpredictable outcomes or timelines.

5 Must Know Facts For Your Next Test

1. Revenue and costs are recognized only upon project completion.
2. It defers both revenue and expense recognition until the end of the contract.
3. Commonly used in construction and engineering industries.
4. Does not reflect ongoing progress, which can distort interim financial statements.
5. Preferred when there is significant uncertainty in estimating the project’s outcome or duration.

Review Questions

• When is revenue recognized under the completed contract method?
• Why might a company choose to use the completed contract method over other methods?
• What impact does the completed contract method have on interim financial statements?

Related terms

Percentage-of-Completion Method:

Revenue recognition principle where income is recorded based on the project's progress.

Revenue Recognition Principle:

The accounting guideline dictating how and when revenue should be recognized.

Long-Term Contracts:

Agreements extending over a period typically longer than one year, involving multiple accounting periods.