Whether a client pays you in a lump sum after your project is completed or you receive payments over time, you’ll want to track all the income flowing in to your company. Then, subtract your project costs to quantify your profits. To do this, you’ll use a method called Cost recovery, an accounting approach that recognizes revenue when a project’s earnings have exceeded all expenses.
Expenses are an unavoidable part of running any business, and making those expenses back is necessary to balance the books. Fortunately, there are different methods to gain back those expenses. One of the most popular is the Cost recovery method, which gains back a company’s investment in a project by comparing total costs to total revenues. Cost recovery is an especially useful tool for assessing the viability of long-term or large-budget projects.
The main advantage of this method is that it makes a comparison between total costs and total revenues in terms of percentages. This makes it easier to quickly assess a project’s success, and it offers a way for businesses to compare multiple investments of similar size or profile. This type of ratio is also commonly used in evaluating depreciation, amortization, and the depletion of natural resources, such as oil or coal.
When Should You Use Cost Recovery?
Cost recovery is a useful accounting method to consider when the likelihood of receiving an installment payment is low. It can be applied to transactions where it is likely that the company will lose money, such as a sale of real estate to an investor who might not pay the full purchase price. It is also a good option for recognizing sales that are made on credit. However, if you’re considering using it in the case of regular installment sales where the probability of receiving each installment is high, it would violate the revenue recognition principle that dictates that income should only be recognized when a company has received the cash for its sale.
How to Calculate Cost Recovery
The formula for calculating cost recovery is simple. You just need two numbers: the total cost of the project, and the total amount of revenue it has generated so far. Then, divide the total cost by the total revenue and multiply by 100 to get a percentage of how much profit the project has earned.
Note: The FreshBooks Support team is not certified in income tax or accounting, so this article should be viewed only as general information and not as an official source of advice. If you have questions about these topics, please reach out to a qualified accountant in your area. You can find an accountant in your local area by going to the FreshBooks App or clicking here. Also, the FreshBooks Support team is not able to assist with any income tax or accounting questions outside of supporting your use of the application.