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Simple English definitions for legal terms
completed-contract accounting method
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A quick definition of completed-contract accounting method:
The completed-contract accounting method is a way of reporting profit or loss on certain long-term contracts by recognizing gross income and expenses in the tax year that the contract is completed. This means that the income and expenses are only recorded when the project is finished, rather than as they occur. It is one of several accounting methods used to determine income and expenses for tax purposes, including accrual accounting, cash-basis accounting, and percentage-of-completion method.
A more thorough explanation:
The completed-contract accounting method is a system for reporting profit or loss on certain long-term contracts by recognizing gross income and expenses in the tax year that the contract is completed.
For example, if a construction company signs a contract to build a new office building and the contract takes three years to complete, the completed-contract accounting method would recognize all the income and expenses related to the project in the year that the building is finished.
This method is different from the percentage-of-completion method, which recognizes revenue gradually during the completion of the subject matter of the contract.
The completed-contract accounting method is commonly used in the construction industry and other industries that involve long-term contracts.