Determining the stage or percentage of the transaction and how much of it is complete and what remains to be completed is one thing. It’s another, although not completely unrelated, to record the transactions in accounting. Under “transactions” I mean not only the revenue, but also receivables and liabilities.

The initial basis for any accounting record is usually either an agreement or an invoice. When performing services over a longer period and using stage of completion, you’re most likely bound to an agreement. This agreement defines the services, quantitative aspects if applicable and what’s more, it also sets out the payment schedule and if any conditions are related to those invoices. 

Obviously you’re sending out invoices as per the agreement, debiting accounts receivables and crediting sales revenue in the amount.

At each period end you should however measure the stage of completion percentage and accordingly adjust your revenue. For an example if you’ve issued invoices in a bigger amount as compared to what you should recognize in revenue, you should account the difference accordingly:

Db          Sales revenue

Cr            Deferred sales revenue

This “deferred sales revenue” has been invoiced (and possibly also paid by the client), however not yet earned as in you haven’t provided services for the amount.

However, if you’ve issued invoices in a smaller amount as compared to recognized revenue using the stage of completion method, you would account it as follows:

Db          Accounts receivables

Cr            Sales revenue

Essentially, if you’ve invoiced less than your recognized revenue, it’s a receivable on your statements and if you’ve invoiced more compared to recognized revenue, it’s your liability.