Advanced Accounting · AS 7 Construction Contracts

Recognition of Contract Revenue and Expenses by Percentage of Completion

Updated 4 October 2026 · Fact-checked

Under AS 7, when a construction contract's outcome can be estimated reliably, you recognise revenue and costs by the stage of completion at the reporting date. Find the stage (usually cost incurred ÷ estimated total cost), apply it to total contract revenue, then deduct revenue recognised earlier to get the current year's revenue.

Understand Recognition of Contract Revenue and Expenses (Percentage of Completion)

A construction contract often runs over more than one year. If you waited until the project ended to show any revenue, early years would show nothing and the last year would show everything. AS 7 avoids this by matching revenue and costs to the work done each year. This is the percentage of completion method.

The method applies only when the outcome of the contract can be estimated reliably. For a fixed price contract, this needs all of these: total contract revenue can be measured reliably; it is probable that economic benefits will flow to the contractor; both the costs to complete and the stage of completion at the reporting date can be measured reliably; and contract costs can be identified and measured reliably so that actual costs can be compared with earlier estimates. For a cost plus contract, you need that it is probable benefits will flow and that contract costs, whether reimbursable or not, can be clearly identified and measured reliably.

The stage of completion can be found in three ways: (a) the proportion of contract costs incurred for work performed to date to the estimated total contract costs; (b) surveys of work performed; (c) completion of a physical proportion of the contract work. Progress payments and advances from the customer usually do not show the work done, so never use them to find the stage.

When using the cost method, count only costs of work actually performed. Leave out costs of future activity, such as materials delivered to site but not yet used (unless made specially for the contract) and advance payments to subcontractors. Those costs are still part of the total contract costs you expect to spend, but they are not costs incurred for work performed. Leave them out of the stage of completion and out of the costs incurred used for the amount due from or to customers. Show them separately as inventory or advances.

When the outcome cannot be estimated reliably, do not use the percentage method. Recognise revenue only to the extent of contract costs incurred that are likely to be recovered, and charge the costs as expenses in the period they are incurred. If total contract costs are expected to exceed total contract revenue, recognise the expected loss as an expense immediately.

Key rules to remember

Stage of completion (cost method): Stage of completion % = Contract costs incurred for work performed to date ÷ Estimated total contract costs × 100; Estimated total cost = cost to date + estimated cost to complete. Exclude costs of future work, such as unused general materials and advances to subcontractors.
Cumulative revenue: Cumulative revenue = Stage of completion % × Total contract revenue; Use the latest estimate of total contract revenue.
Revenue of the current year: Revenue for the year = Cumulative revenue to date − Revenue recognised in earlier years; Always work on cumulative figures and subtract earlier years. Do not apply the year's own percentage to the total.
Cost recognised (cost method): Contract cost for the year = Cost of work performed in the year; Profit for the year = Revenue for the year − Cost for the year.
Expected loss: Expected loss = Estimated total contract costs − Total contract revenue (when positive); Recognise the whole expected loss immediately, whatever the stage of completion.
Gross amount due from / to customers: Costs incurred + Recognised profits − Recognised losses − Progress billings; Costs incurred here is the same cost of work performed figure used for the stage of completion. It excludes costs of future activity. A positive result is an asset (due from customers). A negative result is a liability (due to customers). Work this out contract by contract.
Outcome not reliably estimable: Revenue = Contract costs incurred that are probable of recovery; Cost = Costs incurred; No profit is recognised. Costs are expensed as incurred.

How to solve Recognition of Contract Revenue and Expenses (Percentage of Completion) questions

Use this method for any question on recognising contract revenue and expenses. Keep a small year-wise table with cumulative figures.

1Check whether the outcome can be estimated reliably. If the question says so, or gives a total estimate of costs, use the percentage of completion method. If not, use the cost-recovery treatment.
2Find total contract revenue (the agreed price, as revised by any variations, claims or incentives that meet the AS 7 conditions).
3Find the cost incurred to date for work performed. Remove costs of future work, such as unused general materials and advances to subcontractors.
4Find estimated total cost = cost to date + estimated cost to complete.
5Find the stage of completion. Use the cost proportion unless the question gives a survey or physical proportion. Convert it to a percentage or a fraction.
6Cumulative revenue = stage × total contract revenue. Subtract revenue of earlier years to get this year's revenue.
7Show this year's cost, then profit or loss for the year. If estimated total cost exceeds total revenue, recognise the full expected loss now.
8If asked, compute the gross amount due from or to customers using the same costs incurred figure (cost of work performed), recognised profit or loss, and progress billings. Show excluded costs, such as unused materials, separately as inventory.

Quickest way: Cumulative table method for MCQs and written answers

When to use it: Use it for any multi-year contract question where you must give revenue, cost and profit for each year, or contract WIP.

Draw columns: cumulative cost, estimated total cost, stage %, cumulative revenue, revenue for the year, cost for the year, profit for the year.
Simplify the stage into a fraction, such as 12/40 = 30%, before multiplying. It avoids decimal errors.
Check your work: the profits of all years must add up to total revenue − total actual cost on completion.
For MCQs, first check whether an expected loss exists. If total cost is above total revenue, the answer is the full loss, so eliminate options showing a partial loss.
For MCQs, eliminate options that use the year's percentage alone instead of cumulative revenue minus earlier revenue.
In written answers, show the stage formula, then the working for revenue, cost and profit. Step marks go to the stage calculation and the deduction of earlier years' revenue, so show both.

Common mistakes in Recognition of Contract Revenue and Expenses (Percentage of Completion)

Using progress billings or advances received to find the stage of completion.
Billings are given as numbers in the question and look like a measure of progress.
Fix: Billings show what you have invoiced, not work done. Find the stage from costs for work performed, a survey, or the physical proportion. Use billings only in the amount due from or to customers.
Including unused general materials or advances to subcontractors in cost incurred when finding the stage.
Students take the total cost figure as given.
Fix: Read the cost details. Exclude costs of future activity from the costs incurred used for the stage calculation and for the gross amount due. Use one costs incurred figure (cost of work performed) in both. Show the excluded items separately as inventory or advances until the work is done.
Showing cumulative revenue as the revenue of the year in the second or later years.
Students forget that earlier years' revenue was already recognised.
Fix: Revenue for the year = cumulative revenue − revenue recognised in earlier years. Do the same for cost and profit.
Not updating the estimated total cost in later years.
Students carry forward the first year's estimate.
Fix: At each reporting date, use the latest estimate: cumulative cost + fresh estimate of cost to complete. A change in estimate changes the stage and is applied in the current year's figures.
Recognising only a proportionate part of an expected loss.
Students apply the percentage of completion to the loss as they do for profit.
Fix: Where total estimated cost is more than total contract revenue, recognise the entire expected loss immediately.
Recognising profit when the outcome cannot be estimated reliably.
Students apply the percentage formula without checking the conditions.
Fix: If the outcome is not reliably estimable, recognise revenue only up to recoverable costs incurred and expense the costs. Profit is nil.

Worked examples

Example 1

A contractor enters into a fixed price contract for ₹50,00,000. Cost incurred in year 1 is ₹12,00,000 and the estimated further cost is ₹28,00,000. At the end of year 2, cumulative cost incurred is ₹30,00,000 and the estimated further cost is ₹10,00,000. The contract is completed in year 3 with a total actual cost of ₹41,00,000. Outcome is reliably estimable and the stage is measured by the cost proportion. Compute revenue, cost and profit for each year.

Show the solution

Year 1: estimated total cost = 12,00,000 + 28,00,000 = ₹40,00,000. Stage = 12,00,000 ÷ 40,00,000 = 30%.
Year 1 revenue = 30% × 50,00,000 = ₹15,00,000. Cost = ₹12,00,000. Profit = ₹3,00,000.
Year 2: estimated total cost = 30,00,000 + 10,00,000 = ₹40,00,000. Stage = 30,00,000 ÷ 40,00,000 = 75%.
Cumulative revenue = 75% × 50,00,000 = ₹37,50,000. Year 2 revenue = 37,50,000 − 15,00,000 = ₹22,50,000.
Year 2 cost = 30,00,000 − 12,00,000 = ₹18,00,000. Profit = 22,50,000 − 18,00,000 = ₹4,50,000.
Year 3: contract is complete, so cumulative revenue = ₹50,00,000. Year 3 revenue = 50,00,000 − 37,50,000 = ₹12,50,000.
Year 3 cost = 41,00,000 − 30,00,000 = ₹11,00,000. Profit = 12,50,000 − 11,00,000 = ₹1,50,000.
Check: total profit = 3,00,000 + 4,50,000 + 1,50,000 = ₹9,00,000, which equals 50,00,000 − 41,00,000.

Answer: Revenue: Year 1 ₹15,00,000; Year 2 ₹22,50,000; Year 3 ₹12,50,000. Cost: ₹12,00,000; ₹18,00,000; ₹11,00,000. Profit: ₹3,00,000; ₹4,50,000; ₹1,50,000 (total ₹9,00,000).

Example 2

A contractor has a fixed price contract for ₹75,00,000. At the year end, total costs incurred are ₹27,00,000, which include ₹3,00,000 of general materials delivered to site but not yet used. The estimated cost to complete the remaining work, including using these materials, is ₹36,00,000. Progress billings are ₹28,00,000. This is the first year. Compute revenue, cost and profit for the year, and the gross amount due from or to customers. Outcome is reliably estimable.

Show the solution

Cost of work performed to date = 27,00,000 − 3,00,000 unused materials = ₹24,00,000.
Estimated total cost = 24,00,000 + 36,00,000 = ₹60,00,000.
Stage of completion = 24,00,000 ÷ 60,00,000 = 40%.
Revenue = 40% × 75,00,000 = ₹30,00,000.
Cost recognised = ₹24,00,000. Profit = 30,00,000 − 24,00,000 = ₹6,00,000. Total expected profit check: 75,00,000 − 60,00,000 = 15,00,000, and 40% of it is 6,00,000.
The ₹3,00,000 of unused materials relates to future activity. It is not part of the costs incurred for work performed, so it is left out of both the stage calculation and the amount due. It is not an expense for the year. Show it separately as inventory (stores) until it is used.
Gross amount due from customers = Costs incurred 24,00,000 + Recognised profit 6,00,000 − Progress billings 28,00,000 = ₹2,00,000 (asset).

Answer: Revenue ₹30,00,000; cost ₹24,00,000; profit ₹6,00,000. The gross amount due from customers is ₹2,00,000 (an asset). The ₹3,00,000 of unused materials is not in this figure. It is not expensed and is shown separately as inventory (stores).

Exam tips

Always build the cumulative table and check that total profit across years equals total price minus total cost. Examiners often give a final year to test this.
Read cost details for items that must be excluded from the stage calculation, such as unused materials or advances to subcontractors.
Check for an expected loss in every question. Total estimated cost above total revenue means the full loss is recognised in that year.
In MCQs, watch for options that use billings or the year's percentage alone. Those are designed as traps.
In written answers, state in one line that the outcome is reliably estimable and that you are using the cost proportion. Then show the working. This earns the principle mark.

Practice questions from AS 7 Construction Contracts

Recognition of Contract Revenue and Expenses (Percentage of Completion): frequently asked questions

What is the percentage of completion method in AS 7?

It is the method of recognising contract revenue and costs in proportion to the work done by the reporting date. You find the stage of completion and apply it to total contract revenue. It applies only when the outcome of the contract can be estimated reliably.

How do I calculate the stage of completion under AS 7?

The usual method is contract costs incurred for work performed to date divided by estimated total contract costs. AS 7 also allows surveys of work performed or the completion of a physical proportion of the work. Never use progress payments or advances to find the stage.

Which costs are left out when finding the stage of completion?

Leave out costs that relate to future activity, such as materials delivered to site but not yet used (unless made specially for the contract) and advance payments to subcontractors. They are not costs of work performed, so they are also left out of the amount due from or to customers. Show them as inventory or advances until the work is done.

What if the outcome of the contract cannot be estimated reliably?

Then you do not use the percentage method. Recognise revenue only up to the contract costs incurred that are probable of recovery, and expense the costs in the period incurred. If an overall loss is expected, recognise it at once.