Certified Fraud Examiner Practice 2025 - Free Practice Questions and Study Guide

The percentage-of-completion method is a revenue recognition approach that allows companies to recognize revenue proportionally to the progress made on a project, rather than waiting until the project is completely finished. This is particularly useful for long-term contracts, such as construction or manufacturing projects, where the total revenue can be significant and take time to realize.

Under this method, companies determine their progress toward completion based on costs incurred to date relative to the total estimated costs of the project. By applying this approach, firms can match revenue with the expenses incurred, which provides a more accurate reflection of the economic activity occurring within the project period. This leads to financial statements that give stakeholders a clearer view of the company’s ongoing operations and project performance.

Other methods, such as the completed contract method, only recognize revenue once a project is fully complete, which can result in significant fluctuations in income reporting. Meanwhile, the cash basis method records revenues and expenses based primarily on cash flow, ignoring when the work has been performed. The accrual basis method recognizes revenue when it is earned and expenses when incurred, but it does not specifically link revenue recognition to the incremental progress of a project in the way that the percentage-of-completion method does.