Revenue Recognition, ASC 606, and Cabbage for Sage 300 Construction

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The construction industry is a diverse one, relying on a variety of machines and many types of laborers to complete projects on time.

However, the accounting practices a company uses are just as important. For businesses in the construction industry, there are two approaches which have become very popular.

Completed-contract and percentage-of-completion are both methods for recognizing revenue. Understanding how and when to use each of these is important for helping organizations keep track of their finances accurately.

What is the Percentage-of-Completion Method?

One of the accounting methods for recognizing revenues in the construction industry is the percentage-of-completion method. This method was designed to help track progress and is valuable for builders in tracking the profitability of a project as things change.

Once a business has their costs lined out in a relatively accurate manner, they can move forward with a method to recognize revenues. This method is used when both the seller and buyer have enforceable rights in the agreement. While traditional businesses handle sales in a single transaction, ongoing projects can be looked at as prolonged and continuous sales once they reach this point.

This method is effective if the data is relatively dependable. Once the buyer and contractor are expected to satisfy all contractual obligations, and reach a clear contractual agreement, the percentage-of-completion method is a safe choice.

What is the Completed-Contract Method?

While profit is a big part of any industry, sometimes accountants don’t like to consider this data until after a contract has been fulfilled. For construction companies where projects may be ongoing for long periods of time, the completed-contract method is a good option.

This method defers profit until the contract is resolved, allowing incurred costs to be debited to the inventory accounts. This is known as “construction in process” and is similar to “work in progress.” Billings are debited to accounts receivable and credited to account called “Billings on Construction.” Once a project is finished, the difference in these accounts is calculated and recorded as profit.

For companies that want to ensure their reporting is accurate (especially if they have uncertainties about their present financial projections) this method is a safe choice for minimizing the possibility of errors.