In percentage-of-completion accounting, which pair correctly identifies the current asset and current liability accounts?

In percentage-of-completion accounting, which pair correctly identifies the current asset and current liability accounts?

• A. Costs in excess of billings (asset); Billings in excess of costs (liabilities)
• B. Wages payable; Accrued expenses
• C. Inventory; Accounts payable
• D. Prepaid expenses; Accrued liabilities

Answer: (A)

In percentage-of-completion accounting, you track what you’ve spent on a contract against what you’ve billed. When costs incurred exceed the amount billed, the difference is an asset called costs in excess of billings, representing revenue earned but not yet billed. When billings exceed costs, the excess is a liability called billings in excess of costs, representing amounts billed but not yet earned. This pair directly reflects the contract’s progress and the timing of revenue recognition. Other common current assets and liabilities (like wages payable, accrued expenses, accounts payable, inventory, prepaid expenses, or accrued liabilities) are general items not tied to the contract’s billing status, so they don’t specifically identify the current asset and current liability under the percentage-of-completion method.

In percentage-of-completion accounting, you track what you’ve spent on a contract against what you’ve billed. When costs incurred exceed the amount billed, the difference is an asset called costs in excess of billings, representing revenue earned but not yet billed. When billings exceed costs, the excess is a liability called billings in excess of costs, representing amounts billed but not yet earned. This pair directly reflects the contract’s progress and the timing of revenue recognition.

Other common current assets and liabilities (like wages payable, accrued expenses, accounts payable, inventory, prepaid expenses, or accrued liabilities) are general items not tied to the contract’s billing status, so they don’t specifically identify the current asset and current liability under the percentage-of-completion method.