Revenue Recognition

There are several variables that come into play when working with revenue recognition in the construction industry.

Chapter 4 4.01 in “The Book”, discusses the Financial Reporting – GAAP (Generally accepted accounting principles), that must be followed when presenting your financials. As most of us know, and for those of us who don’t  know, the construction industry has two types of methods for financial accounting and reporting which are conformed with GAAP.

The two GAAP acceptable methods of the income recognition:

• Percentage of Completion Method
  • Measurable methods
    • cost to cost method
    • efforts expended method
    • units of work performed method
      • For further details you can go to:
        • 4.02 Calculation of Income Using the Percentage of Completion Method “The Book”
• Completed Method
  • Normally this method is only used when the contractor cannot reasonably estimate contract revenues, costs or gross profit

Although you might not use all of these methods, you should review them and get familiar with them. It’s possible you might have a need to use them in the future. And, it’s possible they will be on the exam.

When I first started out in the construction accounting, finance and management, as a bean counter… Lol!  Sales equals revenue!! When you billed your client, the revenue was booked on the financials.  In most industries, revenue billed is revenue earned and recognized on the books in the period earned. However, in construction accounting, the percentage of completion method-cost to cost, actual cost divided by the estimated or revised estimated cost gives you your percentage of completion. Contract value times the percentage of completion give you your earned revenue. You will have to adjust your revenue or sales on the books to reflect the difference of the billed and earned revenue. This will be your over and under adjustment. So, you can see how the construction industry does vary from some standard industries. Not all revenue is recognized when billed!!

Continue reading chapter 4 of “The Book”, and post your questions and the method you currently use!

Thanks for reading….! Until the next post!!

ps. Don’t forget…

“The new & improved Study Guide will be available Sept. 30, 2017.  All purchases made between now & then will receive the existing one right away so they can start studying, and then the new one automatically will be sent FREE of charge as soon as it is available.”  CFMA

Happy Reading!

Author: Terry Kelley MBA

Controller in the Construction industry. Over the past 30 years I have worked as an electrician (studied 3 years at CCVTC -for Electrical) for 6 years. I've owned my own construction company for over 15 years (where I wore many hats) to include accounting and finance. And, for the remainder of my career I have and still are working as a Controller in the Construction Industry. I have earned my Bachelors degree and MBA in accounting. Now, I am working to earn my CCIFP certification. I have put together this study group in hopes of working together with other CCIFP candidates. View all posts by Terry Kelley MBA