Gross Profit RecognitionGeneral Approach In both methods the same amounts of revenue, cost, and gross profit are recognized. In both methods we add gr
{"Image DocumentName": "Gross Profit Recognition\u2014General Approach", "Image ImageDescription": "The top portion shows the journal entries to recognize revenue, cost of construction (think of this as cost of goods sold), and gross profit. under the completed contract method, while the bottom portion shows the journal entries that achieve this for the percentage-of-completion method. It\u2019s important to understand two key aspects of these journal entries. First, the same amounts of revenue, cost, and gross profit are recognized under both the completed contract and percentage-of-completion methods. The only difference is timing. Second, notice that in both methods we add gross profit (the difference between revenue and cost) to the construction in progress asset. That seems odd\u2014why add profit to what is essentially an inventory account? The key here is that, when Harding recognizes gross profit, Harding is acting like it has sold some portion of the asset to the customer, but Harding keeps the asset in Harding\u2019s own balance sheet (in the construction in progress account) until delivery to the customer. Putting recognized gross profit into the construction in progress account just updates that account to reflect the total value (cost + gross profit = sales price) of the customer\u2019s asset. However, don\u2019t forget that the billings on construction contract account is contra to the construction in progress account. Over the life of the construction project, Harding will bill the customer for the entire sales price of the asset. Therefore, at the end of the contract, the construction in progress account (containing total cost and gross profit) and the billings on construction contract account (containing all amounts billed to the customer) will have equal balances that exactly offset to create a net value of zero. In both methods the same amounts of revenue, cost, and gross profit are recognized. In both methods we add gross profit to the construction in progress asset.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}