Construction projects may take several accounting periods before they are completed. The construction company enters into a contract with the client, which defines when the construction company expects to complete the project and when the client will make the payments. Usually, payments occur throughout the course of the contract. Construction companies use two methods of accounting for these contracts. They are the degree of progress and the contract method finished.
- Degree of progress
The degree of progress recognizes part of the income and expenses for the duration of the contract. The construction company determines the amount of the income and the expenses must be recognized based on the percentage of work completed.
- Degree of advance of accounting
As work progresses in the contract, expenses incurred in connection with the contract are charged to an account called contract costs. The money is credited by the amount of these expenses.
When the company invoices the customer, it registers a debit to the accounts receivable and a credit for the progress of the invoicing. Payments received from the customer are recorded with a charge to cash and a credit to accounts receivable.
At the end of the period, the meter adjusts the progress billing account to determine the revenue earned during the period. The counter determines which percentage of the contract has been completed and is multiplied by the number of times the total of all payments that the customer will have to make. The accountant records a journal entry by debiting the progress of collections and crediting contract revenues for the amount of income earned from that period.
- Contract completed
The completed contract method requires that no income be recognized until the contract is terminated. This method is used when there is doubt as to whether the customer will pay the contract in full.
- Completed accounting contract
As work progresses in the contract, expenses incurred in connection with that contract are charged to an account called construction in progress. The money is credited by the amount of these expenses.
When the company bills the customer, it registers a debit to accounts receivable and a credit for the progress of billing. Payments received from the customer are recorded with a charge to cash and a credit to accounts receivable.
At the end of the project, the company records the income and expenses related to the project. The company debits the progress of collections taxes and credits in the balance of this account. The company also owes construction costs and construction credits in progress for the balance of this account.
In the income statement, the accountant records Construction Income as income and Construction Expenses as an expense.