Vinu: Hey Manu, I'm working on a big interior design project and trying to figure out how to account for it financially. I heard about this percentage of completion method, but I'm not sure how it applies to my situation. Can you explain it with an example?

Manu: Absolutely, Vinu! The percentage of completion method is perfect for long-term projects like yours in the interior design space.

Let's say your interior design contract is worth ₹10 crores, and you expect it to take 30 months to complete. Your estimated expenses for the project are ₹8 crores, leaving you with a profit margin of ₹2 crores.

Vinu: Ok, so how does the percentage of completion method work with these numbers?

Manu: Instead of waiting until the end of the 30 months to recognize the entire revenue and expenses, you'll break it down by accounting periods. For example, you could use monthly or quarterly periods.

Vinu: Got it. So, after the first month, if I've completed 5% of the project, how would that be accounted for?

Manu: Since you've completed 5%, you'd recognize 5% of the total contract revenue, which is ₹50 lakhs (5% of ₹10 crores). You'd also recognize the actual expenses incurred during that month.

Vinu: And this process continues each month until the project is finished?

Manu: Exactly! You'll continue to estimate the percentage of completion and recognize the corresponding revenue and expenses in each period.

Vinu: That's helpful. But how do I determine the percentage of completion for each period?

Manu: There are a couple of ways to do it. One common method is to compare the costs incurred to date with the total estimated costs. So, if you've spent ₹1 crore so far out of your estimated ₹8 crore budget, you could say you've completed approximately 12.5% of the project.

Vinu: This makes much more sense now. Thanks for breaking it down for me, Manu!

Manu: No problem, Vinu! The percentage of completion method can seem a bit complex at first, but it's a valuable tool for accurately tracking your project's financial progress.