Under percentage-of-completion accounting, when is revenue recognized for a long-term contract?

• A. At project completion
• B. Over time as costs incurred relative to total expected costs
• C. When milestones are reached
• D. When billings exceed costs

Answer: (B)

Revenue is recognized over time as the work progresses, using the percentage-of-completion method. This means you estimate the total costs to complete the contract and the total expected revenue, then determine how far along the contract is by dividing costs incurred to date by total estimated costs. The revenue recognized in a period is the percentage of completion multiplied by the total expected contract revenue, so income is matched to the work performed and costs incurred during that period. This progress-based approach reflects the ongoing transfer of value to the customer and aligns with the matching principle.

Recognizing revenue only at project completion would use a completed-contract approach, which delays all revenue and profit until the contract is finished. Relying on milestones might be appropriate in some contexts, but it isn’t the standard method unless milestones reliably reflect progress and can be measured objectively. Tying revenue to billings rather than progress doesn’t determine when revenue is earned under percentage-of-completion.