How to Apply Percentage of Completion Method
Percent of completion method is an accounting term that is used primarily for construction companies. In accounting, you want to try matching your expenses with the revenue you produce, so the percent of completion method looks at your revenue from a contract and applies it proportionally to how much of the project you have completed. The calculation involves three items: construction in progress, construction expenses and construction revenues. Once you make these calculations, you can then enter your journal entries into the company's general ledger.
Locate your contract price, estimated costs, your actual year's costs and the amount you billed for the year. For example, assume you have a $200,000 contract that you expect to cost $150,000. In the first year, your costs were $20,000 and you billed $40,000.
Divide the cost to date by your estimated costs. In the example, $20,000 divided by $150,000 equals 0.1333. This is your percent complete.
Subtract your estimated costs from your contract price to find estimated gross profit. In the example, $200,000 minus $150,000 equals estimated gross profit of $50,000.
Multiply your percent complete by your estimated gross profit to find your construction in progress. Then add the amount to actual expenses to calculate construction revenue for the year. In the example, $50,000 times 0.1333 equals $6,666.67. This amount will be a debit to "Construction in Progress." Then debit "Construction Expenses" by the amount of actual construction expenses. Finally, credit "Construction Revenue" by the sum of the "Construction in Progress" and "Construction Expenses" accounts.