DHOD,

That is a good question, and one that I have spoken to before:

percent completion.

Taking your example of a project with a budgeted $2mm revenue that is 60% complete and assume you have received $2MM.  You can book 60% of the revenues and 60% of budgeted expenses into the Income statement.   The excess you collected of $800K is booked as a liability as Billings in excess of costs and profits on uncompleted contracts.  Interestingly enough you have effectively collected in advance, yet it is shown as a liability which I find strange since you have effectively reduced risk by receiving payment in advance.  What makes things weirder is that this is not like a liability such as an unpaid telephone bill which will come knocking at your door if left unpaid. The client has no clue how % complete you are…the client is paying against a milestone (report provided/test made/etc. etc.) and does not think he is owed anything…maybe in a bankruptcy he may have a claim against an unfinished product but for the most part he thinks he has been  paid for something already.

Take the same example but you haven’t received any money from the client. You will still book 60% of budgeted revenues and expenses, but this time the amount you should have received of $1.2MM is booked as an asset as Costs and profits in excess of billings on uncompleted contracts. Go figure.

In my book, Billings in excess of costs and profits on uncompleted contracts, should not be considered a liability per se, but a source of guaranteed future revenue.  Obviously, one must have the ability to complete the project in order to justify bringing this balance sheet item into future revenue.  Too often investors will look to the assets alone to determine if the company has the wherewithal to complete…and here again I think just looking at the assets is not smart since the ability to complete has as much to do with access to capital as anything else.  My point being is that a smart company will use its cash on hand to grow before borrowing or raising capital.

So that is just my 2 cents worth.

Hope it helps.

Peter