Recognition proportionately over the performance of the contract According to this basis, revenue is recognised even in those cases where the work has not been completed in all respects. This is particularly true in case of long-term contracts which may take few years to complete. In case of such contracts, revenue is recognised on the basis of the work which has becn completed and approved by the contractee (technically known as work certified). This is done on the basis of certain accepted norms which are given below:
(i) When less than one-fourth ofthe contract is completed, no profit should be taken to the Profit and Loss Account,
(ii) When one-fourth or more but less than one-half of the contract is completed. one-third of the profit made to date should be taken to the Profit and Loss Account. This may, further, be reduced on the basis of cash received by the contractor from the coniractee. This is technically known as reducing profit on cash basis.
(iii) If half or more of the contract has been completed, two-third of the profit as reduced on cash basis maybe taken 10 the Profit and Loss account.