The completed contract revenue recognition method is a popular accounting method for businesses that operate in long-term contracts. This method is used to recognize revenue and expenses for a project only when the project is fully completed.
Under this method, a company will not recognize any revenue or expenses until the contract is complete. Once the contract is complete, all revenue and expenses are recognized at once in the company`s financial statements. This means that there is no revenue recognition during the contract period.
The completed contract revenue recognition method is most commonly used in construction projects, where the project may take several years to complete. For instance, a contractor building a large office building will only recognize the revenue and expenses for the project once it is completed.
The advantages of this method are that it is simple and straightforward. Companies do not have to worry about recognizing revenue and expenses before actually completing the project. The method also ensures that the company`s financial statements accurately reflect the results of a completed project.
However, this method can have some disadvantages. It may not be suitable for projects with long time horizons and high uncertainty. It can also result in significant fluctuations in revenue and income, as all revenue and expenses are recognized at once.
Another disadvantage of this method is that it can create higher taxes for a business. Because all revenue and expenses are recognized at once, this means that businesses may incur large amounts of taxes in a single year.
In conclusion, the completed contract revenue recognition method is a popular accounting method for businesses that operate in long-term contracts. While it has some disadvantages, it is simple and straightforward, which makes it a great option for companies that want to accurately reflect the results of a completed project.