Revenue Recognition: Percentage of Completion Formula Example

The percentage of completion method is one of the most common methods of accounting used in construction. In this article, we’ll explain the percentage of completion method, how it works, and give you some real-life examples. The percentage of completion method falls in line with IFRS 15, which indicates that revenue from performance obligations recognized over a period of time should be based on the percentage of completion. The method recognizes revenues and expenses in proportion to the completeness of the contracted project. In this tutorial, you will lean a quick way to calculate percentages in Excel, find the basic percentage formula and a few more formulas for calculating percentage increase, percent of total and more. Based on the percentage of completion calculated using cost date we determine than revenue of $62.5 million has been earned (31.25% multiplied by $200 million total contract value).

The percentage of completion method of accounting requires the reporting of revenues and expenses on a period-by-period  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 20% complete in year one and 35% complete in year two would only have the incremental 15% of the revenue https://www.bookstime.com/ recognized in the second year. The recognition of income and expenses on this work-in-progress basis applies to the income statement, but the balance sheet is handled the same way as the completed contract method. Distilling a partially completed project into accurate, reportable figures can feel like a mathematical feat when so many variables are involved. If the total estimated cost of a project is $100,000, that figure includes supplies and labor.

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Underbilling is the opposite scenario, when the amount billed to date is less than the recognized revenue. Remember, when you type a number followed by the percent sign (%) in Excel, the number is interpreted as a hundredth of its value. For example, 11% is actually stored as 0.11 and Excel uses this underlying value in all formulas and calculations. When applying this formula to real data, it is important that you correctly determine which value is A and which is B. For example, yesterday you had 80 apples and how you have 100, meaning that now you have 20 apples more than before, which is 25% increase.

• Underbilling is the opposite scenario, when the amount billed to date is less than the recognized revenue.
• The current income and expenses are compared with the total estimated costs to determine the tax liability for the year.
• As the result, the formula calculates the percentage of change in this month (column C) comparted to last month (column B).
• As you probably remember from high school math class, a percentage is a fraction of 100 that is calculated by dividing the numerator by the denominator and multiplying the result by 100.
• Take a tour of the practice workbook and download the file to practice by yourself.

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What is the Percentage of Completion Method?

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The screenshot below demonstrates the results returned by the formula, the Percentages of Total column is formatted as percentage with 2 decimal places showing. You use a relative cell reference to cell B2 because you want it to get changed when you copy the formula to other cells of column B. But you enter $B$10 as an absolute cell reference because you want to leave the denominator fixed on B10 when auto-filling the formula down to row 9. In some cases, cost is not used as it can give a certain misleading image, hence time is use as the ascertaining element.

Basic Excel percentage formula

The completed contract method is usually used in the residential sector and on small projects of short duration. Generally accepted accounting principles (GAAP) percentage of completion formula require that revenue be recognized in the period it was earned. This means for most long-term projects, the percentage of completion method should be used.