Question

QUESTION 2 Explain how the percentage of completion method of accounting is different from the cash method of accounting For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac).

Answer 1

Percentage of completion method of accounting V/s Cash method of accounting::

1. Cash method is an accounting system that identifies income (or revenue) only when payment is accepted and expenses only when payment is done. But, the percentage of completion method of revenue recognition is a concept in accounting that refers to a method by which a business recognizes revenue on an ongoing basis depending on the stages of a project’s completion.

2. The cash method is implemented by several sole proprietors and traders with no inventory. But percentage of completion method is adopted by business entities involved in long term projects having high gestation period like construction companies.

3.Cash basis accounting does not follow with the rules of generally accepted accounting principles (GAAP). However, percentage of completion method is a type of accrual system which follows the rules of generally accepted accounting principles.

4.Cash method recognises income when advance has been received from customer, even when it is not yet earned. But percentage of completion method recognises income on the basis of completed work i.e only after earning the revenue on proportionate basis.

5. The cash basis method of accounting is simple and straight-forward, meaning that you will track cash out and cash in. However percentage of completion method requires a more robust accounting process.

6. Formula for percentage complete = Cost incurred till date/ estimated total cost. Formula for revenue recognised = Percentage complete * Contract price - Revenue already recognised. No such formulas are there under cash method of accounting.

Conclusions:

Cash method and percentage of completion method are accounting methods that vary depending on the timing of when expenses and revenues are predictable.