Florida General Contractor Practice Exam

What does the term "accrued income" refer to in the percentage of completion method?

1. Income that is received before it is earned

2. Income that is recognized before it is actually received

3. Income that is not recorded in financial statements

4. Income that is reported exclusively at the end of a project

The correct answer is: Income that is recognized before it is actually received

"Accrued income" in the context of the percentage of completion method refers to income that is recognized before it is actually received. This method allows contractors to recognize revenue based on the progress of a project, rather than waiting until project completion. Under this approach, income is recorded proportionally with the work completed at given intervals. This means that even if payment is not yet received, the contractor acknowledges the income earned for the ongoing work. Therefore, during the course of a project, financial statements reflect the revenue corresponding to the work done, aligning income recognition with the project's progression. This method of accounting is particularly important in construction and long-term projects, as it provides a more accurate financial picture throughout the life of the project, enhancing the relevance and reliability of financial reporting to stakeholders.