In the world of accounting, there are two primary methods used to determine how much revenue should be recognized on a project: the completed contract method and the percentage of completion method. Both methods have their respective advantages and disadvantages, and it’s essential to understand which one is appropriate for your business.

The completed contract method recognizes revenue when a project is completed. This means that all revenues and expenses related to a project are recorded only when the project is complete. This method is beneficial for companies that have projects that are short in duration because it simplifies the accounting process.

However, for long-term contracts, it is not an ideal method to use. This is because the completed contract method does not provide an accurate representation of how much revenue is earned during the period. This can lead to fluctuations in financial statements, making it difficult to compare financial reports over time.

On the other hand, the percentage of completion method recognizes revenue based on the percentage of work that has been completed. This means that revenue is recognized as the project progresses, which provides a more accurate representation of how much revenue is earned during the period.

The percentage of completion method is ideal for long-term projects that extend over many accounting periods. It also provides a more accurate picture of a company`s financial stability, which lenders and investors may find useful. However, this method requires more effort from accountants as it involves estimating the percentage of work completed on a project.

So, which method should you choose? It depends on the nature of your business. If you have short-term projects and want to simplify your accounting process, the completed contract method may be the better option. However, for long-term projects, the percentage of completion method is more accurate and provides a more comprehensive understanding of your business`s financials.

In conclusion, both the completed contract method and the percentage of completion method have their respective advantages and disadvantages, and it is essential to understand which one is appropriate for your business. Choosing the right method can help you maintain accurate financial statements and make informed decisions about your business`s future.