When are revenues typically recognized under the percentage-of-completion method?

When are revenues typically recognized under the percentage-of-completion method?

• A. When contracts are signed
• B. When cash is collected
• C. As work progresses
• D. At project completion

Answer: (C)

Under the percentage-of-completion method, revenues are recognized as work progresses because this approach aligns with the matching principle of accounting. This principle states that expenses should be recognized in the same period as the related revenues. In contracts involving long-term projects, especially in construction or similar industries, it’s not practical or relevant to wait until the project is completely finished to recognize revenue. Instead, by measuring the percentage of the project completed at any given time, companies can more accurately reflect their financial performance and the ongoing economic benefits from the contract. This method allows for a more dynamic view of income, affecting both reporting and decision-making for management and stakeholders. Recognizing revenues as work is done provides a clearer picture of the company's current financial position, as it reflects both the economic realities of ongoing projects and the resources utilized over time. This method also helps in maintaining consistency and comparability of financial statements over reporting periods.

Under the percentage-of-completion method, revenues are recognized as work progresses because this approach aligns with the matching principle of accounting. This principle states that expenses should be recognized in the same period as the related revenues.

In contracts involving long-term projects, especially in construction or similar industries, it’s not practical or relevant to wait until the project is completely finished to recognize revenue. Instead, by measuring the percentage of the project completed at any given time, companies can more accurately reflect their financial performance and the ongoing economic benefits from the contract. This method allows for a more dynamic view of income, affecting both reporting and decision-making for management and stakeholders.

Recognizing revenues as work is done provides a clearer picture of the company's current financial position, as it reflects both the economic realities of ongoing projects and the resources utilized over time. This method also helps in maintaining consistency and comparability of financial statements over reporting periods.