The completion of contract method states that all revenue earned from a contract is recognized once the contract is completed; hence the name "completion of contract". This method is only allowed under US GAAP. This method can only be implemented if it is difficult to estimate the costs of a contract that is under progress, and if the collection of revenue is not assured. One of the biggest advantages of this method is that it is simple, it requires very few journal entries and it bases everything on final results, not estimates. However the biggest disadvantage of this method is that it violates the matching principle.
Example: On January 1st 201X, Adequate Disclosure, Inc. engages with Inadequate Disclosure, Inc. to build its latest corporate office. The contract is a 2 year contract worth $2,000,000 and the total cost to complete this contract is $1,890,000. Adequate Disclosure, Inc. uses the completed contract method, how will Adequate Disclosure, Inc. record this contract?
