The Percentage of Completion Method (POC) is widely used in industries where projects exceed one accounting period, such as construction, engineering, or software development. Compared to methods like completed contract, POC offers a way to recognize revenue and expenses incrementally instead of deferring them until project completion.
Under the POC method, accountants estimate the progress of a project to date—often considering costs incurred, physical work progress, or milestones achieved—and calculate the revenues and expenses based on that percentage. For example, if a construction company is building a bridge and calculations show it's 40% complete at year-end, then 40% of the total contract value and related expenses might be recognized in that year's financial statements.
This method aligns the matching principle, as earnings are recognized where expenses correlate. By connecting revenues and expenses incrementally over time rather than at a project’s conclusion, stakeholders gain insights aligning closer to operational progress. However, it requires careful monitoring and accurate progress assessment to avoid misstatements. By applying this approach properly, businesses maintain alignment with specific accounting principles such as Generally Accepted Accounting Principles (GAAP).