Percentage of Completion Method Journal Entries (Financial Accounting Tutorial #52)

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In the last video we talked about using a generic template to solve how much revenue and gross profit we earned each year. In this tutorial we'll go about reporting journal entries for construction in process (new account), billings (billings on construction in process), collections and revenue and expense entries. I also explain the theory behind how it works. Enjoy :)
EDIT: TRANSPOSITIONAL ERROR: Revenue to date should be $3,528,000 not $3,582,000. It doesn't affect the explanation in this video.
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[@chantel2689]

This is great, truly amazing work. My professor could never give a clear explanation like this.

[@samzsong4652]

Thank you! the book I have did not explain the fundamental ideas behind the journal entries and the matching principle.

[@carloswylie4895]

I am curious as to what type of company perspective are you presenting this? If you are presenting this from a construction contractor perspective, there is never a need for a construction contractor to recognize a Construction in Process asset unless they are actually building something for their own company. In the scenario when there is a contract with a third party to build something, lets say a school, the revenues are driven by the expenses and the only assets will be A/R Billings, A/R Retainage, and Costs in Excess of Billings. Your journal entries would be:To recognize costs incurred related to the contractsDR: Cost or Direct Labor or Direct MaterialsCR: Cash/Accounts PayableTo recognized your billingsDr. A/R BillingsCr: Revenue [Revenue = Percentage Complete * Contract Amount) (Percentage Complete = Cost incurred to date/Estimated Total Cost of the Contract)Dr/CR: Cost and Estimated Earnings in Excess of Billings (CEB)/Billings in Excess of Costs on Uncompleted Contracts(BEC). (These accounts only used if your revenue earned exceeds amounts billed for CEB or if your billed amounts exceed your costs incurred for BEC.As previously stated, the only time I ever see Contruction/Work-In-Progress recognized as an asset is if a contractor is building an asset for their own company or, in the case of manufacturers, when products are in production at period end.

[@ThePorschefan]

Thank God I found this comment, my head was running on circles. I have analyzed Fluor Corp and Mastec Inc 10-K's before and never read anything named construction in process or anything like that. excess billings and backlog where new stuff for me at the time. It didn't made sense what the video was saying, now I feel confident that I learned well before

[@gennyjovellanos2531]

in the book I'm using, it indicates that "Progress Billings on Construction Contracts" is a Liability account(Unearned Revenue) and it exists because the contractor is asking for payment for something that's not yet finish. It's a bit confusing when you said that it's a contra-inventory account and it exists so you won't overstate your assets and for you to account only for the profit. Both are pretty logical, so which is true? or are they are both correct( its just the treatment is different)?

[@jameskladouris1861]

Hey Notepirate, shouldn't Revenue be credited by 3,528,000 not 3,582,000? Since 39.2% of 9,000,000 (the contract price) is 3,528,000. Thanks for the help!

[@tannertucker22]

Thank you. Doesn't the CIP account temporarily overstate the value of the inventory when revenue is recognized? CIP is increased once when cost are incurred and the for the amount of the profit when the gross profit is recognized. Also some contracts may not allow for any BIP for several months after the projected has started and costs incurred so during their would be no contra-asset to bring CIP to its NRV. Please explain.Thank you.

[@misratekiner8920]

could you please make a video about income statement and balance sheed related to this method that you showed us in the video? thank u a lot.

[@JamieLHa]

Thank you for making such a helpful video. Do you have an intention to do the advanced accounting topic in the future? Such as currency translation, consolidation or intersegment eliminations. I have a hard time with them.

[@jadeerpaloli683]

Can you explain accounts receivable management in project accounting

[@muhammadelsayed2693]

Hey, I have a question, that we do not have an account called GP to settle CIP account and Billing account. Please Help

[@max-zl1vm]

SO HELPFUL!!!

[@evelanewang3232]

So helpful!

[@swathica8564]

In this case,it will lead to double recognition of assets in case billings are not received by reporting date

[@spreadtheknowledge7462]

Hi Sir. Please could you tell me how can we cancel the work in progress account in next year? Please reply me. Thanks.

[@maqbool-urrehman4760]

Dr billing cr cip

[@jiayuanwang1342]

Thank you so much

[@lalaisgongon]

Awesome!

[@noonelerum7366]

thanks sir :)

[@asheesh5]

seriously, horrible explanation

[@poopydoodie11]

What would be the journal entry if there is a loss in a year of the contract, lets say year 2? This was a specific question i had on an exam and I was not sure how to book it and the text does not explain. Thanks :)