Understanding Percentage of Completion

Concepts

Accrual Accounting – shows the performance of your business over a period of time by matching income and expenses. The accrual method (vs. cash method) more accurately reflects the economic reality of business.

Cash Method of Accounting - records the actual flow of cash through a business. The cash method reflects the inflow and outflow of cash from your business.

Although the accrual method of accounting requires a bit more work the result is more useful and meaningful financial reports. Accrual accounting accurately matches the efforts and rewards of your business by recording them as they happen, not when cash changes hands. Through monthly adjustments you can reflect earnings for work in progress and be sure not to count customer deposits as revenue when no work has been completed.

QuickBooks Accounting

Expenses:

By entering expenses into QuickBooks as bills are received you are using accrual accounting. The vendor invoices are expensed to the jobs and the bill is listed in the accounts payable record for future payment. Using the Cash Method the bills would be entered when paid, not when received (there is no accounts payable in the cash method of accounting.)

Revenue:

We record revenue as cash deposits are made in QuickBooks. Cash Deposits as the only input for revenue is consistent with the cash method of accounting. Without the % of Completion our accounting records would use both methods of accounting, reducing their usability as management tools. The cash method does not take into account the fact that customers make payments before any work is completed (a liability for your business) and that you complete work and pay expenses prior to receiving payment for the job (an asset for you business.) The % of Completion is a necessary monthly adjustment to the financial records in order to consistently present financial data.