In accounting, POC in accounting means the Percentage of Completion method, which recognizes revenue and also the expenses of long-term contracts over time, progressively, instead of waiting till the project’s end. In the construction and engineering industry, and large-scale manufacturing, such projects could take multiple accounting periods, and waiting till the end could distort the company’s financial performance during the project.
Percentage of Completion Method
The POC method uses the principle of revenue recognition on completed tasks and portions of a project. When a business closes a portion of work on a project, they will determine the percentage of work completed (generally, at the closing of an accounting period) and use this to recognize revenue for the period.
How POC in Accounting Works
To use the POC method, a company usually adopts the cost-to-cost method, which evaluates progress based on the expenses incurred so far relative to the overall anticipated costs for the project.
Formula: Percentage of Completion = (Costs Incurred to Date ÷ Total Estimated Costs) × 100
After finding the percentage of completion, the company calculates the income recognized to date by taking the completion percentage of the total contract revenue. Revenue previously recognized is deducted to figure out the revenue for the current period.
For example, if a project has estimated costs of $1,000,000 and $400,000 has been spent, then the project is considered to be 40% complete. Also, by the contract which states revenue is $1,200,000, we would recognize $480,000 of revenue to date.
Why POC Matters
The percentage of completion method gives you various benefits:
- Accurate financial reporting. This method shows exactly how much work has been done and how profitable it is.
- Better cash flow management. Since it reports income and expenses as they come and go, you have a good idea of how cash is flowing.
- Compliance. The method is compliant with GAAP and IFRS 15, which allows revenue recognition over a period of time when performance obligations are satisfied.
Conclusion
In summary, POC in accounting refers to the percentage of completion method, a widely accepted approach for recognizing revenue and expenses on long-term projects. It offers transparency, aligns with accounting standards, and helps businesses report consistent, reliable financial results. If you need professional aid, reach out to Dimov Tax today. Our team presents expert assistance with POC in accounting.