Companies sell products and services under varying conditions. Some customers pay cash up front; others make payments over several years. Methods of recognizing income also vary depending on the type of sale. Construction companies employ unique methods for recognizing revenue.
Time of Sale Method
Most companies recognize revenue using the time of sale method. Under accrual accounting, businesses recognize revenue when the company earns it. Businesses earn revenue by providing a product or service to the customer. The customer may pay at the time of sale or promise to pay in the future. In either case, the business earned the revenue and recognizes the revenue at this time.
Installment Method
When customers make regular payments over a predetermined length of time and the receipt of future payments is uncertain, the business might use the installment method to record income. Under the installment method, the accountant records the revenue and cost of merchandise at the time of sale. An equal portion of the gross profit is recognized with each payment.
Cost Recovery Method
The cost recovery method also refers to sales involving regular payments and circumstances where the receipt of future payments is uncertain. When a company uses the cost recovery method, the accountant records the sale and cost of merchandise sold at the time of sale. Gross profit is recognized only when the cost of the merchandise is paid in full.
Percentage of Completion
Construction contracts last for an extended period of time, often with customers making payments throughout the life of the contract. Under the percentage of completion method used by construction contractors, revenue is recognized based on the progress of the contract. At the end of each period, the contract progress percentage is estimated. This percentage is applied to the revenues and expenses for the period to determine the amount to recognize.
Completed Contract
The completed contract method is another income recognition method used by construction companies. The completed contract method recognizes income, expenses and gross profit once the construction project is completed.
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