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Percentage of Completion Method (Definition) | 3 Methods to Calculate it - YouTube
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today we have a topic with us as
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percentage of completion method well in
this topic we will try and incorporate
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all the methodology part of how the
method is used it is used for every
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recognition initially it was recorded in
the construction contracts that was es7
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now it has a separate recognition in es9
so what is the percentage of POC a
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method percentage of completion method
see percentage of completion method is
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basically an accounting method for
recognition not only of revenue but also
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of the expenses for the long term
projects which span over more than one
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accounting year so in this method
revenues recognized on what we call as
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yearly basis as a percentage of the work
that is completed during the year so
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revenue for the given year is calculated
as revenue is equal to percentage of
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work that has been completed in the
given period into the total contract
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value okay so here the biggest challenge
is to calculate the percentage of the
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work that has been completed now how to
calculate the percentage of the work
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calculate work that has been completed
that is our second point of discussion
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how to calculate the percentage of the
work that has been completed well to
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estimate the progress of the work or the
completion percentages
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companies can use either of the three
methods the first one goes as the cost
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method to calculate the percentage
completion now in case of the huge
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projects the total cost which will be
incurred on the projects is estimated at
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the start of the project and itself so
that a new company can accordingly go to
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fee for the same so this cost can be
taken as the basis for the calculating
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the percentage of the completion method
as it is you know assume that the
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revenue will go hand-in-hand with
cost incurred so the determine all
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completed you can use the following
formula
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something like there is the percentage
of the work completed is equal to your
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total expenses okay that is incurred on
the project till clause to the
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close of the accounting period that will
be divided by the total estimated cost
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of the contract okay so the above
formula gives the cumulative percentage
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of the work completed on until the close
of the accounting period and from this
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you need to subtract you need to do what
you need to you need to subtract the
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percentage of the work that has been
completed up to the last accounting
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period to arrive at the percentage is the
Welcome written in current accounting
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year no issues this is going little bit
about the headline but no shoes we have
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an example to hedge the condition see
percentage of complete completion
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methods example see let's say a company
named roads and bridges have worn a
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contract for a construction of the foot
over bridges near crowded railway
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stations it is estimated that the total
cost for the projects will be let's say
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a 1 million and this policy of the
company is to add a margin of 20%
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on its cost estimate so the finalized
quotation for the project which is
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agreed by both parties is let's say 1
million plus 1. x 1.2
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- that's gonna be 1,00,000 and 1,20,000
that's 1.2 million so it is
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estimated the company will be able to
finish its project in the 3 years of
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times let's say that and the company has
in cost during the life of the project
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some somewhere like this year 1
let's say 1,00,000 year 2 is standing at
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3,50,000 year 3 is standing at 4,75,000 you're standing at let's say
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1,00,000 so these are all the couple of
details that are there so on the basis
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of the following cost method of
percentage completion
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revenue can be recognized somewhat like
this now I'll form a table here 1 2 3 &
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4 the cost that has been in
here that is 1,00,000 and 3,50,000 we have to
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3,50,000 and 4,75,000 the last one
is 1,00,000 ok cumulative percentage
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completion that's what we are supposed
to indicate here so cumulative
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percentage will be based on the amount
that has been used so this this amount
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first will have to accumulate 1,00,000
here
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1,00,000+3,50,000 and then it goes
around 8,25,000 so that's 475+
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3,50,000 and 5,75,000
that's the final amount the 1,00,000 or
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4,50,000 ,4,75,000+ 4,79,000
that 24 this 1,00,000 + 9,25,000 so
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10,25000 now we will see the
percentage part how much it is completed
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of the so the percentage is calculated
the cumulative percentage of the
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completed part that is what we are
supposed to calculate and year on year
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percentage so the percentage will be
calculated as you know the total the
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cumulative value of completion divided
by the total cost that has been involved
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and make this as constant completely
constant 10,25000
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and you will get the details for the
percentage the cumulative percentage of
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completion now let's see that year on year
percentage why and why percentage
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calculation so that's gonna be 10% for the first year there's gonna
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be no change we have 44 - 25 so 34%
here 95 - 44 so 90%
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minus 34 that's 56 and 100 minus 56
that's 44 so this is Y and Y
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calculation that has been determined so
this is how the calculation is done it's
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a long long long process that's that's
that how it has been worked out the main
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important part that I want to take you
to is not only this part but there are
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some of the prerequisite for calculating
this method the prerequisite that for
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the percentage is a completion method that goes is that you know one of the basic
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principle of the accounting of prudence
has been followed here and this
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accounting principle requires that you
know certain degree of should be
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exercised while recording the revenue
the books of accounts so keeping this Prince
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mine use the percentage of the completion method should be used booking the
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revenues for booking revenue in the
books of account only when the following
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can be a short like unknown first
collections with regards to the
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contracts is assured and to ensure
companies ask to bank guarantees and
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performing guarantees from the debtors
they can also check for the
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credit worthiness of the company before
entering into contract the company can
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fairly determine the what we call as
progress of the work done on the
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contract if this is important because
the revenue is directly related to the
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progress now this are the couple of
things that should be taken in the mind
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before putting down all the numbers well
on the part of the journal entries the
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revenue is recognized under the percentage completion method is not built to the
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customer and revenue recognition in this
case should be routed a different
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account called the unbilled contract
receivable account by this it goes
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around and the ocm method is not only
used in the revenue recognition but
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mostly it is used in the construction
contract method where there is
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escalation of the revenues relation of
and distribution or based on the
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completion of the work done work
certified and completion of work
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uncertified so with this all you know it
it is very important to understand that
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POCM is used highly used in the
accounting accounting scenarios in the
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accounting language so that's it for
this particular topic if you have
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