Completed-Contract Method of Accounting

The completed-contract method of accounting is used by contractors and manufacturers. Unlike the percentage-of-completion method which recognizes revenues and gross profit in the applicable periods of the construction or manufacturing process, and not only in the period when the construction has been completed, under the completed-contract method of accounting, revenue, expenses, and gross profit is deferred until the completion of the contract. If at the end of the business fiscal year of a company work on a contract remains incomplete, no revenue, expenses, and profit on that contract is recognized in the current year on the income statement; all costs and billings are retained in respective balance sheet accounts.

The completed-contract method does not accurately reflect revenues, expenses, and profits in the period in which they are earned. The tax advantage is the deferral of all tax liability to future periods. Generally this method of accounting may be used by contractors and manufacturers averaging less than $10 million in annual revenues if it is initially elected as their tax accounting method.

The journal entries utilized with the completed-contract method are similar to those of the percentage-of-completion method, except there are no entries recognizing revenue or gross profit during the construction or manufacturing process: no transactions relating to that contract are posted to revenue and expense accounts until completion of the job.