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Percentage of completion method for invoicing

For most businesses, recording income is a simple matter of recording an invoice in QuickBooks. Income is generally recognized when work is performed and when the invoice gets recorded.

Contractors sometimes receive payments for work not yet performed (an upfront job deposit), or for work only partially completed. The amount you have invoiced in excess of the actual work completed is unearned revenue. The accounting theory here is that since the work is not complete, it has not been earned and should not be recorded as income until the work is finished.

When you receive a check from a customer for work that's only partially complete, or when you invoice a customer in excess of the work you have completed to date, you have to separate out the unearned part of that income and assign it to a special account. That sum will be recognized as income later, after it is earned. After you have completed that portion of the work, you remove it from the liability account called Unearned Revenue and post it into an income account.

This is known as percentage of completion accounting because you recognize revenue only when that portion is completed. The best way to accomplish this is to invoice the customer based on a progress basis, for example, based on a percentage complete on or before the last day of each month. This requires you to spell out in the contract that you will be invoicing on or before the last day of each month. (Shorter projects could get invoiced as soon as they are complete, or on the 15th and the last day of the month.)

With progress invoicing, you will probably also want to indicate in the contract that the customer has a short amount of time to pay each installment. Good terms to use in such a case would be Due on Receipt, as you may not wish to be out of pocket for the costs for the project for an additional 30 days since you haven't required a deposit.

If you record an invoice in QuickBooks as described above and you have entered all the job-related costs for the same project during the same month, you will be recognizing both the income and the costs in the same time period. Your financial statements will be accurate and you will have met the guidelines of the percentage of completion accounting method.

See also

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