Accounting Unplugged

Percentage of Completion and Work in Progress

Posted in 6. Operations by Erin Lawlor on the September 11th, 2008

<< Cost of Goods Sold and Inventory Accounting Journals and Ledgers

The Revenue Principle of GAAP requires Revenue to be recorded in the period it is Earned regardless of when it is billed or when cash is received.

In some cases, it is simple to determine the timing for Revenues Earned, once ownership of a product is transferred or a service is complete, revenue is considered to have been earned.  But if revenue recognition were delayed until the end of a long term contract, the Matching Principle of tying revenues and their direct costs to each other would be violated.  The solution to this problem is the Percentage of Completion method of Revenue Recognition.

Contract Revenues are tied to Costs, but Billings on Contracts are not always tied to Costs. Sometimes elements of a contract are billed in advance or sometimes they are delayed by mutual agreement (or disagreement). This mismatch between actual billed revenue and earned revenue will require an adjusting entry but since the Percentage of Completion method adjusts billed revenue to reflect earned revenue, billings are posted to revenues and adjusted later to reflect the correct earned revenue amount. (Debit Accounts Receivable, Credit Sales).

Long Term Contracts will have estimates for both sides of a contract, Costs and Revenues.  Calculating Percentage of Completion requires both total actual and total estimated numbers to calculate a percentage so it uses the side where both the actual and estimated numbers can be known, Costs.

  • Percent Complete = Actual Costs to Date / Total Estimated Costs

The Percent Complete is then applied to the Total Estimated Revenue to determine Earned Revenue to Date.

  • Earned Revenue to Date = Percent Complete * Total Estimated Revenue

Finally, the Earned Revenue to Date is compared to the Billings on Contract to Date.  The difference is either added to or subtracted from the Revenue.

  • Total Billings on Contract – Earned Revenue to Date = Over/Under Billed Revenue

**The Over/Under Billed Revenue accounts are Balance Sheet Accounts and they are often called either Billings in Excess of Costs (liability account that reflects over-billings) or Costs in Excess of Billings (asset account that reflects under-billings).

Work In Progress Statement:

A Work in Progress Statement is used to compile the information necessary for the percentage of completion calculations but also to provide crucial information about the total value and progress of work on hand inventory.

Description Contract Value Actual Billings to Date Actual Costs to Date Total Est. Costs Est. Costs to Complete Estimated Gross Profit % Complete Earned Revenue to Date Over Billings Under Billings
Contract A 50,000 35,000 30,000 40,000 10,000 10,000 75% 37,500 2,500
Contract B 52,500 27,500 22,500 45,000 22,500 7,500 50% 26,250 1,250
Totals 102,500 62,500 52,500 85,000 32,500 17,500 62% 63,750 1,250 2,500

So, for Contract A

  • Percentage Complete = 30,000 / 40,000 = .75
  • Earned Revenue = 50,000 * .75 = 37,500
  • Over/Under Billings = 37,500 – 35,000 = 2,500 (Under-Billed)

Entries to record Over/Under Billings:

Account Description Debits Credits
1250 Costs in Excess of Billings $2,500
2050 Billings in Excess of Costs $1,250
4000 Sales $1,250
$2,500 $2,500

What if there were prior balances in the Costs and Billings in Excess Accounts?

The amounts from Work in Progress Statement are either Total Estimates or Total Amounts to Date. This means that the over/under amounts are also total to date amounts. Over/Under adjustment entries are made to adjust total numbers to their “To Date” amounts. If there were previous entries, there would also be previous balances in the Costs/Billings in excess accounts. New entries should bring their balances to the new “To Date” amounts.

Assume that the Costs in Excess of Billings account had a previous balance of 1,000 and the Billings in Excess of Costs account had a previous balance of 500. The net prior amount is Costs in Excess of 500 meaning that earned revenue has already been adjusted for that 500 and only requires an additional adjustment of 1,250 – 500 = 750.  Instead of the entries listed above, the entries to adjust Earned Revenue in this case would be.

Account Description Debits Credits
2050 Billings in Excess of Costs $500
1250 Costs in Excess of Billings $2,500
1250 Costs in Excess of Billings $1,000
2050 Billings in Excess of Costs $1,250
4000 Sales $750
$3,000 $3,000

Notice that I completely removed the previous balances from both the Costs and Billings in Excess Accounts instead of just making net entries to bring them up to the current balance. This creates a good audit trail for future account analysis.

© 2008 – 2010 Erin Lawlor

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**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

16 Responses to 'Percentage of Completion and Work in Progress'

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  1. admin said,

    on December 28th, 2009 at 3:59 pm

    Thanks to Jennifer Holten for spotting a calculation error in my “est. cost to complete” column.

  2. michael byakabasa said,

    on June 18th, 2010 at 8:12 am

    There will be scenarios where project costs cannot be reliably estimated.In such cases would it not be best to recognise only revenue that has been billed and the project costs incurred to in the period?
    I am currently working on valuation of WIP for a client in the service sector and have found that their estimates of project revenue/costs in the past have not been all that accurate.
    Michael Byakabasa

  3. admin said,

    on June 18th, 2010 at 9:38 am


    It depends. Costs are recognized as they are incurred but as far as revenue, be careful in recognizing it only as it is billed. You’ll need some other way to ensure billings are on target than actual billings.

    There should be an upfront agreement with the buyer about total expected costs to them, it may be a set amount and it may be a percentage of costs. If it’s a percentage of costs, use that figure in determining revenue recognition. If it’s a set amount, then you would proceed as outlined in the post.

    If there is no buyer in advance, it seems to me that the project is on spec and is then an asset until sold with no cost or revenue recognition until the sales event.

  4. James said,

    on August 19th, 2010 at 9:16 am

    Could you also show how it is presented on the financials or is that in another post? What would be the adjustment to the Income Statement?

  5. admin said,

    on August 19th, 2010 at 9:42 am


    The entry against “Sales” is the Income Statement adjustment. People will often choose to use another Revenue account rather than their Sales Account – perhaps “Billing Adjustments” or something like that. But the income statement adjustments are always to Revenue.

    Hope that helps,


  6. Evans Komen said,

    on October 4th, 2010 at 11:31 pm

    1. at what stage can we recognize work in progress as part of the assets of a company and how should it be treated while reporting in line with both IFRS and IAS.

  7. Kelly R said,

    on January 14th, 2011 at 4:56 pm

    This is the best explanation for a layperson that I have found for percentage of completion/work in progress accounting. Thank you for your clear language and easily-understood calculations.

  8. michelle said,

    on February 18th, 2011 at 4:00 pm

    When should over unders be booked? We have always done this at year end when we do the CSR and give all of the financials to the CPA. He now wants them done quarterly, at extra expense. Why would he want to change booking these to quarterly instead of yearly after 35 years of doing it yearly with nothing said to the contrary?

  9. admin said,

    on February 18th, 2011 at 5:12 pm


    It depends on how often you file your taxes, I suspect the reason your CPA is requiring the over/under booking quarterly is to match your tax filings. In that case I would support your CPA’s decision.


  10. Melissa said,

    on May 10th, 2011 at 6:29 am


    They should be booked on a monthly basis so your monthly financial statements are more accurate. There can be large ups & downs that make it hard to tell how the company is doing if you do not adjust your revenues.

  11. Barry said,

    on September 27th, 2011 at 12:04 am

    What (revenue or expenditure) should be manipulated to recognise a loss making job?

    For example, a six month job, with very tight margins incurs cost overruns prior to any progress claims being made (ie. I have no revenue recognised against that job, but I expect to make a loss on the job, and wish to recognise that loss,

    Should my entry be to accrue negative revenue, or accrue additional costs to the P&L, not WIP) in order to achieve my loss result?


  12. Jeetendra said,

    on January 24th, 2012 at 6:23 am

    In one of our project the value got revised as a result of deletion in scope of work. We have booked an excess revenue in the last FY based on the initial value, however the value got revised in the current year. How do I treat the excess revenue booked last year in the current year. Can someone tell me the accounting entries for this?

  13. Ravi said,

    on May 15th, 2012 at 9:02 am

    how will you treat the advance billing say 10% as shown in the payment schedule in the revenue recognition

  14. Mikayla said,

    on April 5th, 2013 at 6:45 am

    Great blog here! I also enjoyed the post!

  15. JJ said,

    on May 24th, 2013 at 12:22 pm

    You removed the posts to each adjusting account of over or under billing, but you did not remove the amount to the sales account.
    What happens when you do recieve that income and post it to the sales account, doesn’t that account become inaccurate? or could that account have a debit amount at other times to properly report the over/under income amounts??

  16. admin said,

    on May 24th, 2013 at 2:10 pm


    Earning the income is a separate issue from receiving it.

    You make adjustments to the Sales Account each time you make the over/under billing adjustments. So, once you’ve earned the income, you increase the Sales Account and decrease the Over Billing Account.


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