Project Accounting and Revenue Recognition
Cost, revenue, and the ledger
Project accounting connects delivery to the general ledger. Candidates must understand cost rates versus bill rates, burden or indirect cost, and the difference between cost of sales and operating expense. Understand revenue recognition methods: time and materials (recognize as delivered), fixed price with percentage-of-completion (cost-to-cost), milestone (recognize on achievement), and straight-line over the period. Know the concept of unbilled and deferred revenue, work in progress, and how a billing event and a revenue event can diverge in timing.
The core accounting relationship
Understand that billing and revenue are separate processes: an invoice creates a receivable and reduces unbilled; revenue recognition creates revenue and reduces deferred or increases unbilled. A project can be profitable on billings yet show a different revenue figure in a period because the two processes run on different schedules. Know how to compute percent complete from cost-to-cost and how to apply it to total estimated revenue and cost to derive period revenue and margin.
Traps
High-frequency errors: assuming revenue equals invoiced amount (only true for T&M); forgetting that a change in total estimated cost changes the percent complete and therefore the period revenue; confusing deferred revenue (billed ahead of work) with unbilled receivables (work ahead of billing); and treating a write-off as a revenue adjustment rather than a cost or receivable reduction.
Worked example
Fixed-price contract of 1,000,000 with total estimated cost 800,000. Actual cost to date is 200,000, so percent complete is 25%. Revenue recognized is 250,000 and cost is 200,000, giving margin of 50,000 for the period.