The completed contract method is a popular accounting method used in construction projects. It is particularly useful for large-scale projects that can take several years to complete and involve multiple stages or phases. This accounting method allows contractors to recognize revenues and expenses at the end of a project, as opposed to recognizing them as the project progresses.
In a nutshell, the completed contract method involves waiting until the entirety of a project is finished before recognizing any revenue or costs. Once the project is complete, the contractor recognizes the total revenue and expenses incurred during the project, and calculates their profit or loss.
The completed contract method can be more accurate than other accounting methods, such as the percentage of completion method, which requires estimates of project completion and can be subject to change. The completed contract method, on the other hand, provides a clear picture of the final outcome and expenses incurred, which can help contractors make better decisions in the future.
One important aspect of the completed contract method is that it must comply with generally accepted accounting principles (GAAP). This means that contractors must follow strict guidelines and record all relevant information related to the project, including contracts, invoices, and other financial transactions. Failure to do so can result in penalties and legal consequences.
The completed contract method can also be beneficial for tax purposes. Since revenue is not recognized until the end of the project, contractors are not required to pay taxes on that revenue until it is earned. This can help contractors save money on taxes in the short term.
In conclusion, the completed contract method is a useful accounting method for construction projects. It allows contractors to accurately track expenses and revenue, and can provide a clear picture of the total cost of a project. By following GAAP guidelines and accurately recording financial information, contractors can ensure that they are using this method correctly and avoiding any legal or financial repercussions.