Revenue Calculation for Fixed Price Projects

This topic explains the effects of the following accounting methods on revenue recognition for fixed price projects:

• Accrual-Basis

• Billings And Costs

• Completed Project

• Project Percentage Complete

Accrual-Basis Method

For fixed price projects that use the accrual-basis accounting method, you do not run the revenue recognition functions to recognize revenue.

For these projects, costs are automatically debited to the cost of sales account when you post cost transactions. For example, when you post an equipment usage transaction, the general ledger entry is:

When you post invoices for a project in Accounts Receivable, the transaction is immediately posted to the revenue account, as follows:

Billings And Costs Method

To calculate revenue for fixed price projects that use the billings and costs accounting method, the program determines:

• The amount to credit the revenue account for the period.

This is the total amount billed for the project to the specified cut-off date or fiscal year and period, or since you last recognized revenue.

• The amount that will be charged to the cost of sales account for the period.

This is the total cost incurred on the project to the specified cut-off date or fiscal year and period, or since you last recognized revenue.

• There is no entry to the work in progress account for gross profit, since revenue and costs are calculated independently.

Completed Project Method

For fixed price projects that use the completed project accounting method, the program does not credit the revenue account or charge the cost of sales account until the project is marked Completed. Until then, all costs are accumulated in the work in progress account, and billings are accumulated in the billings account.

When you change the status of a project to Completed, the next time you run the revenue recognition functions, the program recognizes as revenue the sum of all the billings for the project.

It also charges the total costs incurred to cost of sales and credits the work in progress account to eliminate project-related balances from that account, as follows:

Project Percentage Complete Method

For fixed price projects that use the project percentage complete method, the program first calculates the percentage complete. Then, to determine the amount of revenue to recognize for the period, it:

1. Determines the revenue earned to date.

   • Multiplies the calculated percentage complete by the fixed price.

   % complete

   *

   Fixed price amount

    

2. Determines the amount of revenue to recognize for the period.

   Amount earned to date

   -

   Revenue recognized previously

   This is the amount that will be credited (or debited, if negative) to the revenue account.

    

3. Determines the profit earned to date.

   Current estimated revenue (functional currency)

   -

   Current estimated costs

   *

   Percentage complete

    

4. Determines the profit to recognize for the period.

   Profit earned to date

   -

   Profit previously recognized

   This is the amount that will be charged to work in progress (or credited, if negative).

    

5. Determines the cost for the period.

   Revenue for the period

   -

   Profit for the period

   This is the amount that will be charged to cost of sales.

    

6. If the project is marked Complete, the program clears the accumulated, offsetting amounts from the billings and work in progress accounts and marks the project Closed.

The journal entry to record revenue periodically throughout the project depends on your selection for the Percentage Complete Method option on the Settings tab of the PJC Options form.

• If you opted to clear the billings and work in progress accounts when you close percentage completion projects, the entry is:

The following general ledger entry is used when you complete a project that uses a percentage complete accounting method:

If there are any unrecognized amounts in the billings account (from invoices entered manually through Accounts Receivable), the program adjusts the revenue account, accordingly. Note that this entry may be combined with the closing entry.

If there are any unrecognized costs in the work in progress account (that is, non-labor costs that were not recognized under the labor hours percentage complete method), the program adjusts the cost of sales account:

• If you opted to clear the billings and work in progress accounts during revenue recognition, the entry is:

Related Topics