The percent of revenue or completion method is a business accounting practice that allows a company to record costs and profits as the company works to complete a given contract. This system works best for contracts that occur over multiple fiscal quarters or even fiscal years. The percent of revenue relies heavily on estimated gross profit numbers and total cost calculations to determine quarterly profits and expenses.
Percent of Revenue Process
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The percent of revenue or completion method of accounting allows a business to record a portion of revenues and costs from a given contract over the life of the agreement. The company records revenues and costs during each fiscal quarter where the business actually incurs the costs and receives revenues. According to BusinessDictionary.com, the percent of revenue or completion method of accounting is most useful when the business can reasonably predict the profits and costs for completing an agreement for service. This is different than the completed contract method, which allows a company to record earnings and costs only when the business completes a given contract.
Percent of Revenue Formula
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Calculating percent of revenue or completion requires a business to determine cumulative revenue for a given financial quarter. To determine cumulative revenue, multiply the contract cost incurred to date with the total contract price. Divide the resulting number by the total estimated cost of completing the contract to obtain cumulative revenue. For example, if a business incurs $10,000 in cost for a contract worth $50,000 and estimates $30,000 in total completion costs, cumulative revenue for a given period of time is $16,666.
Calculating Completion Percentages
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Determining the completion percentage for a given contract plays into how much a business earns each year for that contract. To calculate the completion percentage for a contract, divide the costs to date by the contract's total estimated costs. For example, a company incurring $10,000 in costs on a contract with a total estimated cost of $100,000 has completed 10 percent of the contract. Calculating gross profit to date requires a business to multiply the percentage of completion by the total estimated profit for the contract. For example, a contract that's 10 percent completed with a total estimated value of $100,000 earned the business $10,000 in gross profit to date.
Accounting Method Advantages
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A business with a long-term contract to provide goods or services uses the percent of revenue or completion method as a means to track expenses and earnings over multiple financial quarters. This makes preparing tax documents easier because the business isn't waiting until the contract completion date to record expenses and calculate total earnings. For a contract occurring over several years, the percentage of revenue method allows the business to write off expenses as the company incurs them, which reduces yearly tax liability and the amount owed to the federal government.
