Business Glossary

method that recognizes profit on a long-term construction contract as it is earned gradually during the construction period. This approach is preferred over the completed contract method because it does a better job of matching revenue and expense in the period of benefit. It should be used when reliable estimates of the degree of completion are possible. It is more realistic and levels out the earnings. Under the method, the measure of revenue to be recognized each year is equal to percentage completed x contract price. One approach to estimate the percentage completed is based on the following relationship:

Any revenue that had been recognized in a prior period is subtracted from the cumulative total in arriving at the current period's income.

method of reporting income from long-term contracts based on the percentage of a contract completed during the tax year. Costs allocated to the contract and incurred before the close of the tax year are compared to total estimated costs of the completed contract. That percentage of completion is applied to the gross revenue from the contract to determine the amount to be included in taxable income for that tax year. Taxpayers using the percentage-of-completion method are also subject to the look-back rule for recomputing prior-year tax liability.