Why are liabilities lower in % of completion method vs. completed contract method? I understand that you recognize profits earlier so cash goes up, assets goes up. by why are liabilities lower?
Because under the completed contract method, the company cannot record any revenues, cost or profit until the entire project is completed. All costs accumulate as inventory (construction in progress) and all amounts billed to customers accumulate as liability (advance billings). In the % of completition method project costs are expensed as incurred based on the below formula: Current period expenses = [(Cost incurred to date/ Total estimated costs of the project)x Expected revenues] - prior year revenues