Comparison of Completed Contract and Percentage-of-Completion Methods

Explanation

Under the completed contract method, revenues and expenses are recognized only after the contract has been fulfilled. During all intermediate periods, costs are reported as inventory while revenues are treated as advances from customers. On the other hand, in the percentage-of-completion method, revenues are recognized in proportion to the percentage of the project completed, as measured by the costs incurred or engineering estimates available. Therefore, a firm shows higher assets and liabilities under completed contract method but lower equity than under percentage-of-completion.