Under this Method, Revenue, Expenses, and Profits associated with the contract are recognized only when the contract is completed. This method contrasts with the Percentage of Completion Method.
Key Elements of this method:
Recognizing Time: No revenue or profit is recognized before the completion of the project.
Accounting Treatment: Costs incurred during the period are shown as work in progress in the balance sheet.
Example: ABC Construction Company undertakes a contract to build a bridge for ₹1 crore. The project is completed after 3 years, and the expenses are incurred as follows:
Here are certain points and steps to be kept in mind:-
* 1. Since all the revenue is recognized after completion of 3 years, so the cost incurred will be shown in work in progress.
(Year1-20, Year2-30, Year-3=40)
* 2. All the amount received from customer will be treated as advance (liability) till 3 years.
(Year1=10, Year2=20, Year3=30)
* 3. Once the work is completed, the work in progress will be transferred to cost of sales leaving the work in progress balance 0.
* 4. Now, the total revenue earned will be recognized with receivables which leaves the profit of 10lakhs.
* 5. The advance that was received from the customers will now go in receivables account (60 lakhs) , leaving a balance of 40 lakhs in the receivables account.
* 6. And finally the 40lakhs received in 4th year will be recorded and leave zero balance in receivables account.
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