In construction contracts, customers pay the amount in installment and the full amount of revenue cannot be recorded in the first year of the project. Instead, a portion of the revenue is recorded using the estimates of the professional surveyor.
As accountant cannot record the full amount as the revenue in the first year, he or she cannot issue the invoice of the whole amount in the very first year. Here comes the role of Progress Payments comes into focus.
Progress payments are raised over the customers for the recovery of the amount for that period. So, they work like an invoice apparently. The journal entry for this would be as follows:
When the entity receives the payment against the progress payment invoice,the accountant passes the following journal entry:
So, far we have been recording Progress payments to recover monies from the customers. But, we need to record sales revenue as well and this can only be done when the surveyor conducts the survey and provides the report for the stage of completion of the project.Once the accountant come to know the stage of completion, he or she records the portion of the revenue against the progress payments. The entries would be recorded as follows:
|To record sales revenue|
In order to follow the matching principle of accounting and present a true and fair view, the accountant has to pass the following entry as well:
|To record related cost of the period|
|Cost of sales||Debit|