Completed-Contract Accounting Method Law and Legal Definition

Completed-contract accounting method means a method of reporting profit or loss on certain long term contracts by considering gross income and expenses in the tax year in which the contract is accomplished. It allows a taxpayer whose income is derived from long-term contracts to account for the entire results of a contract at one time. It is designed to provide an alternative to the annual-accrual method of accounting for long-term contracts for which the ultimate profit or loss is not ascertainable until the contract is completed.

The completed-contract accounting method recognizes income only when the contract is completed. Accordingly, costs of contracts in process and current billings are accumulated but there are no interim charges or credits to income other than provision for losses. It is a modification of a strict accrual method and differs in the one respect that items of income and expense, though recorded in primary accounts when accrued or incurred, are not carried into profit and loss as earnings of the business until the contract to which they relate is completed. A separate account is kept for each contract. Any debit balance in the account represents the investment in the contract and any credit balance represents unearned income until the completion of the contract. A characteristic of this system is that income earned in one accounting period may not be accounted for until a later period. It is peculiarly adapted to a business fulfilling contracts which lap over accounting periods where the ultimate gain or loss can not be accurately determined until the completion of the contract.