What is the effect of the completion rate in the construction accounting on the financial statements?

The effect is that collections are assured and the accounting system can estimate profitability and measure progress towards completion.

Financial Statements - Revenue Recognition and Accounting Entries Accounting Entries The best way to identify the appropriate accounting entries is to consider an example: Construction Company ABC, has just obtained a $50 million contract to build a five-building resort in the Bahamas for Meridian Vacations.
Company ABC estimates that each building will take a full year to build.
Meridian Vacations has agreed to pay Company ABC according to the following schedule: $5m in year1, $10m in year2, $10m in year3, $10m in year4 and $15m in year5.
Company ABC has estimated that the total cost of this contact will be $35m, and will occur over the five years in this way; $5m in year1, $4m in year2, $10m in year3, $10m in year4 and $6m in year5.
Equal monthly payments will be made to ABC, and Meridian will have a30-day grace period except for the last payment in year5.
Percentage-of-Completed-Contract Method We first need to estimate the revenues Company ABC will declare each year.
Remember we are using the percentage-of-completion method based on estimated cost.
Results:1.
Annual Income Statement Entries In each year, the revenues, expenses would be entered as seen on the following table.2.
Balance Sheet Statement Entries Figure6.9: Construction Company ABC's Balance Sheet (% of Completion Method) Explanation of Balance Sheet Entries: •Cash:It is the total cash Company ABC has on hand at the end of the year, and is defined as the total cash inflow minus the total cash outflow.
If the result of this equation were negative, the company would have to borrow from its line of credit additional funds to cover its total expenses.
• Accounts Receivable:The total amount billed less the cash received by Meridian.
• Net construction in progress (asset) and net advance billing (liability): These accounts offset each other and are composed of construction in progress less total billings.◦ If the result of this equation were negative, the company would have billed its client for more than what has delivered.
This would have constituted a liability for the construction company, and would have been reported as net advance billings.
◦If this equation were positive, then the company would have built more than the client has paid for it, and the result of the equation would have constituted an asset and would be recorded as net construction in progress.
◦In most cases, companies only report net construction in progress or net advance billing on their balance sheet.
•Retained earnings -The cumulative shares of the total profit to date.
This item is not shown on the balance sheet above.
It normally appears after shareholders equity.
Formula6.5 Construction in progress = the cumulative cost incurred since inception + (cumulative percentage of completion x total estimated net profit of the project) Less Total billings = cumulative amount billed to the client since inception Look Out! Remember, if the result of the above equation is: Positive (asset) = net construction in progress Negative (liability) = net advance billings Completed-Contract Method Under this accounting methodology, revenues and expenses are not recognized until the contract is completed and the title is transferred to the client.
Annual Income Statements In this case, nothing would be reported on the annual income statements until Year5.
Balance Sheet Statements Under this method, the balance sheet entries are the same as the percentage-of -completion method, except for the Net Advance Billing account.
Balance Sheet Entries •Cash and accounts receivables stay the same under both the percentage of completion and completed contract methods.
◦This is normal because, no matter which method you use, you always know how mush cash you have in the bank, and you how much credit you have extended to your client.
•Net construction in progress (asset) / net advance billing - The basic concepts are the same, except that under this methodology, construction in progress does not include the cumulative effect of gross profits in the formula (i.e.
excludes cumulative percentage of completion x total estimated net profit of the project).

cost certified completes and no work in progress anymore

Percentage completion is a methos used for recognising revenue from long term construction contracts.