When you are working with a large fixed-price project, you can apply assessment principles to recognize cost and revenue in profit and loss. There are two different methods to choose when looking at an assessment principle:
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The conservative principle, generally referred to as the Completed contract method.
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The optimistic approach, generally referred to as the Completed percentage method.
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Method |
Description |
|---|---|
|
Completed percentage method |
This method is used for calculating the revenue during the project. Revenue is accrued on the basis of the completion percentage and the contract value in order to match cost and revenue during the project. During the project the Gross work in process (WIP) value on the balance sheet is valued to sales price. |
|
Completed contract method |
This method is used to capitalize expenses, items, and hours in order to match cost and revenue on the profit-and-loss account at the end of the project. During the project the Gross WIP value in the balance sheet is valued to cost price. |
