What does the percentage-of-completion method do regarding revenue recognition?

The percentage-of-completion method recognizes revenue and gross profit in each accounting period based on the progress made toward completing a long-term contract. This method is primarily used in industries where contracts span multiple accounting periods, such as construction or large projects, allowing companies to reflect the economic reality of their contract performance as it unfolds.

Under this method, revenue is recognized proportionally to the costs incurred to date compared to the estimated total costs of the contract. Therefore, as a project progresses, both revenue and gross profit can be reported based on the work completed at the end of each accounting period, providing a more accurate representation of the company's financial performance related to ongoing work.

This approach contrasts with recognizing all revenue and profits only upon project completion, which could distort the financial statements during the life of the contract, especially if the completion takes a significant amount of time. This timely recognition aids in better financial forecasting and analysis for companies engaged in long-term contracts.