Understanding Profit Recognition

You use the job progress applications to track actual costs compared to the expected (budgeted) costs based on the percent complete of each task. The percent complete is determined by the computation method that is assigned to each account. For profit recognition, you use the percent complete to project the final costs and projected final revenue for the entire job. Profit recognition is an accounting process that you can use to record the revenue earned or lost, based on the percent that a job is complete at any time during the progress of the job. Profit recognition is independent of the billing status of the job; you can recognize profit for a job even if you have not billed the customer for the completed work.

When you run the profit recognition programs, the system calculates the profit or loss for the period based on the actual and projected final values (costs and revenues). The system then generates journal entries to adjust the actual costs and revenue according to:

• Whether you enter accrued or deferred costs.

• Whether you recognize deferred revenue all at once or proportionately over the life of the job.

• Whether you have over billings or under billings for the period.

• Whether you calculate profit based on revenue or costs.

• Whether you have reached the threshold percent complete.

The system generates the journal entries to the accounts that are set up in the profit recognition automatic accounting instructions (AAIs), or to the accounts specified in processing options. Many of the journal entries are accrued amounts that the system reverses in the next period. The system tracks profit by period, quarter, year, and job.