What does the percentage of completion method of accounting do?

The percentage of completion method of accounting is designed to recognize profit as it is earned throughout the life of a project, rather than waiting until the project is completely finished. This method is particularly useful for long-term contracts, such as construction projects, where work is performed over several periods. Under this approach, revenues and expenses are recorded based on the progress of the project, which is often estimated by comparing costs incurred to date with total estimated costs.

As work progresses, the company will recognize revenue and estimate profit based on the percentage of the project that has been completed at any given time. This reflects the economic reality of the project and provides more meaningful financial reporting to stakeholders, as they can see how much profit is being earned in relation to the work completed so far. By using this method, companies can provide a clearer view of ongoing profitability, which is especially important for projects that span multiple accounting periods.

The other options represent methods or principles that do not align with the objectives of the percentage of completion method. For instance, recording all expenses at the end or ignoring estimated profit would not provide timely or accurate insights into the financial performance of a project.