With the down turn in the economy more and more companies are worried about how soon they can recognize revenue.  In most cases revenue recognition is almost right away but when a company enters into a contract to provide services the question enters when do they recognized revenue.  There are two different ways that companies might recognize revenue, completed contract or percent completed.  Under the completed contract method all revenue is recognized when the contract is completed where percent completed method records revenue as the contract is complete.  There are different reasons why either of these options might be selected for a company and many companies like to use both methods. 

Completed contract method is a much easier way of recognizing revenue, because revenue is only record when the contract is finished.  Because of this companies also do not have to report costs from this contract on their income statement.  This method causes problems for smaller companies because their income statement can have large jumps and dips if the company might only have a few contracts.  This method also causes problems for investors because it is hard to judge how the company is doing if they are not recording revenue when earned but rather when the contract is finished.  For long term contracts companies could be forced to wait years and years to recognize any revenue. This method has the benefits of being a cheaper and easier way of recording revenue because revenue, gross profit and costs will hit the income statement all at the same time right as the contract is finished. 

The other method of recognizing revenue on contracts is the percent completed method.  This method takes in account how much of the contract has been finished and will recognize revenue that has been earned because part of the contract has been completed.  This method conforms with the principal of matching revenue and expense in the period they occurred.  Because of this an investor is able to get a better idea of what is going on in the company each period.  This method also tracks losses in a period better because these losses are realized in the period they occur.  The down side of this method is that it costs money to track how much of a contracted has been completed.  Professionals need to be hired to make estimates about how much of the contract has been finished.  Once these estimates are made calculations need to be made to figure out how much revenue has been realized and also how much gross profit has been made. The method is a better judgment of the company over all but also faces expensive expenses that can cut into a company's gross profit. 

This leads to a cost benefit analyses of which method is better.  For small companies the completed contract method may be the only option because of the cost to hire professional to make estimates.  Also large company have many contracts going on and have investors that expect to see the period by period results of the company which forces these companies to need to use the completed contract method.  Mid-size companies are the ones that would need to weigh the cost-benefits of these options.  Most times this analysis is done for the percent complete method.  A firm has to determine how much level of detail they need and if they are able to afford hiring professionals.  Hiring more people cut into the net income of a company and a company needs to have a need to better track their revenue.  In the end revenue recognition and its option come down to how much level of detail a company can afford.