How do I record income from long-term projects spanning several months?

Understanding the challenge of long-term project income

Recording income from long-term projects that stretch across several months can feel confusing because the work, the cash, and the “earned” value don’t always happen at the same time. You might sign a contract in January, do most of the work from February through May, invoice in stages, and receive the final payment in June. If you simply record income when cash arrives, your books might show a weak spring and an amazing summer—even if your effort and delivery were steady all along. That distortion can make it hard to judge profitability, plan taxes, manage cash flow, and communicate results to stakeholders.

The goal is to match revenue to the period in which you actually earn it, while still keeping your invoicing, payments, and compliance clean. The right approach depends on what accounting basis you use, what your contract says, and how reliably you can measure progress. Some methods emphasize simplicity and cash management; others emphasize accuracy and matching. This article walks through the core options and how to apply them in real life, including practical examples, common pitfalls, and a step-by-step workflow you can adapt to your own projects.

Start with your accounting basis: cash vs. accrual

Before you choose a method for recording income, you need to know whether your records are maintained on a cash basis or an accrual basis. This is not just a bookkeeping preference—it shapes what “income” means in your system.

Cash basis recognizes income when you receive money and recognizes expenses when you pay them. It is straightforward and closely tied to your bank balance. Many freelancers, small service firms, and early-stage businesses use cash basis because it’s easy to maintain and helps avoid paying tax on money you haven’t collected. The downside is that it can paint a misleading picture for long-term projects: months of work may show no revenue until payment arrives.

Accrual basis recognizes income when it is earned and expenses when they are incurred, regardless of when cash moves. For long-term projects, accrual accounting typically results in smoother, more meaningful monthly performance reporting because it aligns revenue with progress. The trade-off is complexity: you must estimate progress and manage balances like accounts receivable, deferred revenue, and work-in-progress.

Even if you operate on cash basis for tax purposes, you can still use accrual-style internal reporting to understand project profitability month by month. Many businesses do exactly that: they run simplified cash accounting for filing and a more informative management view for decisions.

Clarify what “income” means on a long-term project

On a long-term project, multiple financial concepts can be described casually as “income,” but they are not the same thing in accounting. Getting these distinctions right will keep your records consistent and prevent accidental double-counting.

Contract value is the total price agreed for the project, including fixed fees and estimated variable components. Contract value is not automatically revenue; it’s the size of the deal.

Invoices are requests for payment. Issuing an invoice does not always mean you’ve earned the revenue (especially if you bill upfront). Invoicing affects accounts receivable on accrual basis and may affect income on cash basis when paid.

Cash receipts are deposits you actually receive. Cash receipts always affect your bank and can affect revenue on cash basis, but on accrual basis they may reduce receivables or deferred revenue without immediately changing revenue.

Revenue earned is the portion of the contract you have delivered according to the contract terms and accepted performance obligations. This is what most people mean when they say “record income” in an accrual sense.

Deferred revenue (sometimes called “unearned revenue”) represents money received for work you haven’t earned yet. It is a liability until you deliver the service or product.

Work in progress (WIP) represents earned value not yet billed, often seen in construction, consulting, and agencies that bill after milestones are achieved. WIP can be an asset if you’ve earned revenue but haven’t invoiced.

The main methods to record income over several months

There is no single universal method that fits every long-term project. The right choice balances accuracy, effort, and what your contract and operations support. Here are the most common approaches used for projects spanning multiple months.

Method 1: Record income when cash is received (cash basis)

This method is simple: when the client pays, you record income. If you’re a sole trader or small service provider, this might be how your tax reporting works. It can be perfectly acceptable for compliance in some contexts, but it can be misleading for performance tracking when projects span several months.

How it looks in practice: You receive £10,000 in May for work performed March through May. Under cash basis, your revenue appears in May only. March and April show no project income even though work occurred.

Pros: minimal admin; ties to bank; avoids recording revenue you might not collect; easy for very small operations.

Cons: poor month-to-month insight; profitability and capacity planning are distorted; large payments can make a single month look artificially strong.

When it works well: short projects; businesses where cash timing is the primary concern; very small operations with limited reporting needs.

Method 2: Record income when invoiced (invoice basis / modified cash)

Some businesses treat invoices as the key event: when an invoice is issued, they record income (and accounts receivable if using accrual-style bookkeeping). This approach can be closer to accrual than pure cash basis, but it still depends on whether invoices align with earning. If you invoice at milestones that reflect actual progress, invoicing can be a reasonable proxy for revenue earned. If you invoice upfront, it can overstate revenue early in the project.

Example: A project runs January through April. You invoice 25% at the end of each month based on work completed. Recording income when invoiced results in monthly revenue that mirrors progress.

Risk: If you invoice 50% upfront in January but deliver most work in March and April, recording income in January will overstate early revenue and understate later revenue.

Best use case: milestone billing that closely corresponds to deliverables and acceptance.

Method 3: Recognize revenue over time based on progress (percentage of completion)

For many long-term projects, the most informative and widely used approach is to recognize revenue over time as you progress. This is often called the percentage-of-completion method. The idea is straightforward: if you can measure progress reliably, you recognize the portion of the total contract value that corresponds to that progress during each period.

Progress can be measured in several ways. The best measure is the one that most faithfully represents the work transferred to the client.

Common progress measures include:

Cost-to-cost: Recognize revenue based on costs incurred as a proportion of total expected project costs. This works well when costs are a good proxy for progress and you can estimate total costs reliably.

Units delivered / milestones achieved: Recognize revenue when specific deliverables are completed and accepted. This works well when deliverables are distinct and measurable.

Time elapsed / labor hours: Recognize revenue based on hours worked as a proportion of total expected hours. This works well for professional services when time is the primary driver of delivery.

Example using labor hours: You have a fixed-fee contract of £40,000 expected to take 400 hours over four months. At the end of month one, you have logged 120 hours. Progress is 120/400 = 30%. You would recognize 30% of £40,000 = £12,000 of revenue in month one (assuming the work delivered aligns to hours).

Why this helps: Your monthly financials reflect the work performed, not the billing schedule. You can see whether the project is profitable and on track while it’s still in progress.

Method 4: Recognize revenue at completion (completed contract method)

Under the completed contract approach, you do not recognize revenue until the project is substantially complete (or delivered and accepted, depending on your industry). Throughout the project, you may track costs and billings, but revenue waits until the end.

This approach can be used when progress cannot be measured reliably or when projects are short enough that the difference doesn’t matter much. It can also be used for internal simplicity, but it provides poor interim insight for multi-month work.

Pros: avoids estimates; reduces risk of reversing revenue; simple conceptually.

Cons: financial statements look “lumpy”; managers get little insight mid-project; can mask problems until the end.

Method 5: Treat upfront payments as deposits and earn them over time (deferred revenue)

Many long-term projects involve deposits, retainers, or upfront payments. If you receive cash before you earn the revenue, the clean approach is to record the payment as deferred revenue (a liability) and then recognize revenue as you perform the work.

Example: A client pays £20,000 upfront in January for a project delivered February through May. When you receive the money, you record deferred revenue of £20,000. Each month, as you earn revenue, you reduce deferred revenue and record revenue in your income statement.

This method prevents overstating revenue early, and it provides clarity about obligations you still owe to clients.

Choosing the right method: a practical decision framework

To choose a method that fits your situation, evaluate your project and contract against a few practical questions:

1) Can you measure progress reliably? If yes, a progress-based approach is often best. If no, completion-based recognition may be safer.

2) Does your invoicing reflect progress? If invoices align tightly with deliverables, invoice-based recognition might be acceptable for internal reporting. If not, you’ll need deferred revenue or WIP adjustments.

3) Is the contract fixed-fee, time-and-materials, or mixed? Fixed-fee projects benefit greatly from progress tracking. Time-and-materials often naturally track progress through billable hours, though caps and change orders can complicate it.

4) How important are monthly financial statements? If you rely on monthly reporting for decisions, staffing, or investor updates, progress-based recognition is worth the effort.

5) How variable is scope? Highly changeable scope requires careful tracking of change orders and contract modifications, whichever method you use.

Breaking down the bookkeeping mechanics

Once you choose a method, you need to implement it in your bookkeeping system. The mechanics below describe how long-term project income is typically recorded in a structured way.

Key accounts you’ll likely use

Revenue (income account): This is where earned income is recorded.

Accounts receivable (asset): Amounts you have invoiced but not yet collected.

Deferred revenue (liability): Amounts you have collected but not yet earned.

Work in progress / unbilled revenue (asset): Earned revenue not yet invoiced.

Contract costs (expense accounts): Labor, subcontractors, materials, and overhead allocated to the project.

Sometimes: WIP clearing accounts: Used to manage timing differences between costs, billings, and revenue recognition.

Scenario A: You bill monthly in arrears and collect later

If you bill after the work is performed and invoices represent earned value, the entries are straightforward on accrual accounting.

At month end (recognize revenue): If you invoice immediately, you can record revenue by invoicing. If you recognize revenue before invoicing, you record unbilled revenue/WIP.

When you issue an invoice: Debit accounts receivable, credit revenue (if revenue not already recognized), or credit unbilled revenue/WIP (if you already recognized revenue earlier).

When cash arrives: Debit cash, credit accounts receivable.

This structure keeps revenue aligned to delivery and allows you to see receivables outstanding.

Scenario B: You take a deposit up front and deliver over time

Deposits and upfront payments require deferred revenue if you want accrual-style matching.

When you receive the deposit: Debit cash, credit deferred revenue.

As you earn revenue each month: Debit deferred revenue, credit revenue.

This way, your income statement reflects actual delivery, while your balance sheet shows your remaining obligation.

Scenario C: You recognize revenue over time but invoice at milestones

This is a very common real-world case: progress is continuous, but invoices happen at specific points. In this situation, you need to track whether you have billed more or less than the revenue you have earned so far.

If you have earned more than you have billed, you have unbilled revenue (an asset). If you have billed more than you have earned, you have deferred revenue (a liability). Each month you adjust the balance so your revenue reflects progress.

Example: Total contract £100,000. After month two you are 40% complete, so cumulative earned revenue should be £40,000. But you have only invoiced £25,000 so far. You would recognize revenue to date of £40,000 and record the difference (£15,000) as unbilled revenue/WIP.

Later, when you invoice the next milestone, you may reduce that unbilled revenue/WIP balance instead of recording new revenue (because you already recognized it).

How to calculate progress for revenue recognition

If you decide to recognize revenue over time, the quality of your progress measure matters. A progress estimate that is sloppy or inconsistent will produce noisy financial statements. Here are practical ways to build a progress model you can maintain.

Option 1: Hours-based progress

This is often the simplest for professional services.

Steps:

1) Build an estimated hours budget by role or workstream (e.g., design 80 hours, development 220, QA 60, project management 40).

2) Track actual hours weekly. Time tracking must be consistent and complete.

3) Each month, calculate cumulative actual hours / total estimated hours to determine completion percentage.

4) Multiply completion percentage by total contract value to get cumulative revenue earned.

5) Compare cumulative earned revenue to revenue already recognized and record the monthly adjustment.

Tip: Update the total estimated hours when scope changes. If you don’t, your percentage will drift and your revenue timing will become distorted.

Option 2: Cost-to-cost progress

This is common in industries where direct costs are a reliable proxy for progress.

Steps:

1) Estimate total project costs (labor, subcontractors, materials).

2) Track actual costs incurred to date.

3) Completion percentage = costs incurred to date / total estimated costs.

4) Earned revenue to date = completion percentage × total contract value.

Watch-outs: Some costs may be incurred early (like purchasing materials) without corresponding delivery to the client. If costs spike early, cost-to-cost can over-recognize revenue unless you adjust for that reality.

Option 3: Deliverable-based progress

If the project has clear deliverables, you can assign weights to each deliverable and recognize revenue as each is completed and accepted.

Example: Discovery 15%, Design 25%, Build 45%, Launch 15%. When Design is complete and accepted, you recognize the portion allocated to Design.

This approach is easy to explain to clients and stakeholders, but it depends on having truly distinct deliverables with meaningful acceptance criteria.

Handling change orders, scope creep, and contract modifications

Long-term projects almost always change. A client may add features, remove tasks, extend deadlines, or shift priorities. If you don’t reflect these changes in your revenue tracking, your income recognition can become detached from reality.

Best practice: Treat each approved change order as a modification to the contract value and, if relevant, the cost or hours budget. Update your project forecast immediately when the change is agreed.

When your contract value increases, your total revenue to recognize increases. If the change order covers work already performed, you may need to “catch up” revenue recognition in the current period. If it covers future work, it will flow into revenue over the remaining project timeline based on your progress measure.

Scope creep warning: Unapproved scope creep is not revenue. You might be doing extra work, but until there is an agreement to pay for it, recognizing revenue would overstate income. Track the effort internally, but keep it separate from recognized income until pricing is approved.

Retainage, holdbacks, and delayed acceptance

Some industries use retainage (a portion of payment withheld until completion) or acceptance clauses that delay when revenue is considered earned. In these cases, you must separate the concept of “earned” from “paid.”

If you have delivered the work according to the contract and acceptance is largely procedural, you may recognize revenue while recording a receivable (or contract asset) for the retainage. If acceptance is substantive and uncertain, it may be safer to delay revenue recognition until acceptance occurs. The right answer depends on how your contracts define acceptance and how certain you are that acceptance will happen without significant rework.

Practical bookkeeping implication: Even if you recognize revenue over time, you might still show a growing receivable or contract asset that includes retainage amounts not yet billed or not yet payable.

Unbilled work and work-in-progress: keeping it clean

One of the most confusing parts of long-term projects is unbilled work. You might be earning revenue each month, but you only invoice at milestones. In that case, your income statement can show revenue even when there is no invoice and no cash. That’s correct under accrual logic, but you need a clean way to represent the gap on the balance sheet.

Unbilled revenue/WIP as an asset: This represents work delivered but not yet invoiced. It is essentially an IOU you have earned under the contract terms.

Deferred revenue as a liability: This represents invoices or cash received for work not yet delivered.

The discipline is to avoid mixing these two. If you always ask, “Have we earned this portion yet?” you can choose the correct side: unearned belongs in deferred revenue; earned but unbilled belongs in WIP.

Revenue recognition vs. project profitability

Recording income correctly is only half the story. For long-term projects, you also need to understand whether the revenue you are recognizing is profitable given the costs you are incurring.

Gross margin tracking: Each month, compare the revenue recognized to the costs incurred for the project in the same period. If you are recognizing revenue over time, you can also recognize costs as incurred (typical) to get a clear monthly gross margin.

Forecasting profit at completion: A powerful management habit is to estimate “profit at completion” each month. If your forecasted total costs rise, your expected margin shrinks. This allows you to catch a problem early and renegotiate scope, change resourcing, or improve efficiency before the project ends.

Loss-making projects: If a project is expected to lose money overall, you should not let revenue recognition hide that reality. Internal reporting should highlight the forecasted loss promptly so you can act.

Step-by-step workflow you can use each month

Here is a practical monthly process you can adopt, whether you use spreadsheets or accounting software.

Step 1: Update project status

Collect project hours, costs, deliverable completion status, and any scope changes. Confirm whether any new change orders were approved and whether any deliverables were accepted by the client.

Step 2: Update the forecast

Update the total expected hours or costs to complete the project. Update total contract value for approved changes. This forecast is the foundation for your percentage of completion calculation.

Step 3: Calculate completion percentage

Depending on your method, compute completion percentage based on hours, costs, or weighted deliverables.

Step 4: Compute cumulative revenue earned

Cumulative earned revenue = completion percentage × total contract value (or sum of earned deliverable amounts).

Step 5: Determine revenue to recognize this month

Monthly revenue = cumulative earned revenue − revenue recognized in prior months.

Step 6: Reconcile billings and cash

Compare cumulative invoices to cumulative revenue earned. If invoices exceed earned revenue, the difference belongs in deferred revenue. If earned revenue exceeds invoices, the difference belongs in unbilled revenue/WIP. Then reconcile cash receipts against receivables and deferred revenue movements.

Step 7: Review profitability and risks

Compare recognized revenue and incurred costs for the month and year-to-date. Identify margin trends and consider whether forecasted hours or costs are creeping up.

Concrete example: fixed-fee project with upfront deposit and milestone billing

Let’s put it all together with a realistic scenario.

You sign a £60,000 fixed-fee contract to deliver a project over three months (January–March). The client pays a £20,000 deposit in January, and you invoice £20,000 at the end of February and £20,000 at completion in March. You estimate the project will take 300 hours: 90 in January, 120 in February, 90 in March.

January: You work 90 hours. Completion percentage = 90/300 = 30%. Cumulative earned revenue should be 30% × £60,000 = £18,000. You received £20,000 cash deposit. Under an accrual approach, you record the deposit as deferred revenue at receipt. At month end, you recognize £18,000 of revenue by reducing deferred revenue. Deferred revenue remaining = £2,000.

February: You work another 120 hours. Cumulative hours = 210. Completion percentage = 210/300 = 70%. Cumulative earned revenue = 70% × £60,000 = £42,000. You already recognized £18,000 in January, so February revenue is £24,000. At the end of February you also invoice £20,000. If the client hasn’t paid yet, that creates accounts receivable. Depending on how you structured January’s deposit, you may have a small mix of deferred revenue and receivables, but the key is that your income statement shows £24,000 revenue for February regardless of the invoice timing.

March: You complete the remaining 90 hours. Completion percentage = 100%. Cumulative earned revenue = £60,000. You have recognized £42,000 to date, so March revenue is £18,000. You invoice the final £20,000 at completion. Any remaining deferred revenue or unbilled revenue balances should clear as invoices and cash settle.

This approach produces revenue that reflects delivery: £18,000 in January, £24,000 in February, and £18,000 in March—rather than lumpy revenue aligned only to deposits and milestones.

Common mistakes to avoid

Mistake 1: Treating deposits as revenue immediately

If you record the entire deposit as revenue when received, you might overstate income early and understate it later. This is especially risky if you later refund part of the deposit or if delivery is delayed.

Mistake 2: Double-counting revenue when invoicing after recognizing WIP

If you recognize revenue monthly using WIP and then later record the invoice as revenue again, you’ll inflate income. The invoice should often reduce unbilled revenue/WIP instead.

Mistake 3: Failing to update estimates

Progress-based methods depend on estimates. If your total expected hours or costs change, update them. Otherwise, your completion percentage will become inaccurate and your revenue timing will drift.

Mistake 4: Ignoring unapproved scope creep

Extra work does not equal extra revenue until the client agrees to pay for it. Track it, but don’t recognize income for it prematurely.

Mistake 5: Not separating operational tracking from accounting records

Your project management system (tasks, time, deliverables) and your accounting system (invoices, payments, revenue) must reconcile. If they don’t, you will spend months arguing with your own numbers.

How to align your invoicing strategy with clean revenue tracking

Your invoicing strategy can either simplify your accounting or create constant adjustments. If you have flexibility in contract design, consider these approaches:

Use monthly progress billing where possible

If your clients accept it, billing monthly based on work performed makes recognition easier and improves cash flow.

Define milestones with acceptance criteria

Clear milestones reduce disputes and make it easier to connect invoicing to delivered value.

Clarify deposit terms

Specify whether deposits are refundable, what they cover, and how they are applied to final invoices. This reduces confusion in deferred revenue handling.

Document change orders formally

A quick written approval process for scope changes protects your margins and keeps revenue tracking accurate.

What to do if you use simple bookkeeping software

Not everyone has sophisticated project accounting modules. If you use basic bookkeeping software, you can still record income for long-term projects accurately with a simple structure.

Use separate balance sheet accounts for deferred revenue and unbilled revenue

Even basic systems usually allow you to create these accounts. They become the “buffers” that let you match revenue to progress without breaking your invoicing or bank reconciliation.

Use tracking categories

If your system supports project tracking, classes, tags, or jobs, use them consistently for all invoices, bills, and journal entries. This makes project-level reporting possible.

Maintain a monthly project reconciliation sheet

A spreadsheet can serve as the bridge: it tracks contract value, progress, revenue recognized to date, invoices issued to date, and the resulting deferred or unbilled balance. Each month, you post a single adjustment entry to bring the accounting records in line with the spreadsheet.

Tax, reporting, and stakeholder communication considerations

Different stakeholders care about different views of “income.” Tax authorities may focus on taxable profit and rules tied to your accounting basis. Banks may want consistent, supportable financial statements. Investors and partners may want performance metrics that reflect delivery rather than billing.

A practical approach is to separate:

Statutory/tax view: The method required or permitted for filing.

Management view: A progress-based method that helps you run the business.

When you communicate results, be transparent about the basis used. If your internal reports recognize revenue over time but your tax reporting is cash-based, you can still reconcile them so decisions are made with the best information available.

Quick checklist for long-term project income recording

1) Confirm your accounting basis and reporting needs.

2) Choose a revenue recognition approach that matches how you deliver value.

3) Set up the right accounts: revenue, receivables, deferred revenue, and unbilled revenue/WIP.

4) Track progress consistently (hours, costs, deliverables).

5) Update forecasts when scope changes.

6) Reconcile earned revenue to invoices each month to avoid double-counting.

7) Review project profitability and forecasted margin regularly.

Final thoughts: make your numbers reflect reality

Long-term projects can be profitable and stable, but only if your accounting tells you what is actually happening. Recording income only when cash arrives may be easy, but it can hide performance issues and make planning difficult. Recording income only when invoices are issued can be better, but only if invoicing aligns with earning. For many multi-month projects, recognizing revenue over time—supported by a consistent progress measure—creates the clearest picture of your true monthly performance.

The best system is the one you can maintain consistently. Start with a method that fits your contract structure, implement a simple monthly routine, and refine as you learn what best represents progress in your work. When your revenue recognition matches delivery, your project decisions improve, your profitability analysis becomes more trustworthy, and your business becomes easier to steer.