What is percentage of completion | Methods, Advantages & Disadvantages of percentage of completion

From this video you will learn What is percentage of completion explained and Methods of percentage of completion, Advantages & Disadvantages of percentage of completion in stock market for beginners in english.

Percentage of Completion:
The percentage of completion is an accounting method in which the business recognizes the revenue and expenses of a long term project on an ongoing basis depending on the stages of completion or the proportion of work completed in the project. The long term projects are the projects that span over more than one accounting year.
This is in contrast to the other method used for revenue recognition which is called as Completed contract method
Methods:
Cost to cost method: Percentage of completion is commonly calculated through the cost to cost method which compares the costs that are incurred to estimated costs. To estimate the percentage of completion. We have to divide the total expenditure incurred from the start to date with the total estimated costs of the contract.
It is measured using the formula:
Percentage of work completed = total costs / total estimates costs for the contract
The value is then applied to determine the total revenue for the project.
Revenue earned = contract amount * percentage of work complete

Advantages of percentage of completion method:
- It allocates the cost and revenue pertaining to a particular period based on the extent of completion of the contract or the project
- It does not allocate the proportion of cost that is incurred but is not currently put to use in the project.
- It allows you to report your expenses each year.
- It allows the business owner to take care of any tax adjustments upfront which creates less room for error and simplifies the reporting process.

Disadvantages of percentage of completion method:
- This method does not reveal the earnings of any revenue on the financial statements of a construction company until its projects are substantially complete,
- If the initial estimate of the revenue and costs of the project are not accurate then there may be changes and adjustments to them which are done quite frequently that show fluctuations in the revenue and costs noted in the accounting books.
- This method is vulnerable to abuse by unethical companies.
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Видео What is percentage of completion | Methods, Advantages & Disadvantages of percentage of completion канала SimplyInfo