Is it the corporate version of the old rhyme, “See a penny, pick it up”? Unfortunately, not. It’s much more complicated than that, and it’s getting even more complicated with the new revenue recognition standards.
In this guide, we’ll help you understand the key aspects of revenue recognition, the new GAAP principles, what they mean for your business, and how automation can help you recognize revenue more efficiently and accurately.
Key Aspects of Revenue Recognition
Revenue is the income that a business receives as a result of its activities (from selling products and/or services). There are three types of revenue a company may receive as a result of its business activities: sales revenue, incidental revenue, and non-operating revenue.
According to the Revenue Recognition Principle, as outlined by the Generally Accepted Accounting Principles (GAAP) guidance, revenue must be recognized when realized or realizable and earned.
This basically means revenue is recognized when it’s realized or earned, irrespective of when the cash comes in. Recognizing the revenue means recording the amount of ‘consideration’ as ‘earned’ in a company’s financial statements. It’s the process by which companies identify ‘when’ and ‘how much’ (expected) is to be recorded as earned or recognized revenue. Revenue is earned when a company has delivered the product(s) and/or performed the services, and met all criteria for revenue recognition as outlined by the GAAP guidance.
Now, a customer may pre-pay or post-pay for a product and/or service or pay at the point of sale. However, the company must recognize the payment (pre-payment, post-payment or point of sale payment) at the point in time when the company satisfies the terms of the sales contract and the ‘value’ of the deal is delivered or transferred to the customer.
As an example, let’s say your company builds widgets –
Now, imagine your company is selling millions of widgets, “widget installation” services, and a “widget warranty.” And imagine what it takes to keep track of all that revenue. This, of course, gets even more complicated when you take into account discounts and special packages. All these factors and more can affect the pricing and timing of your revenue.
When you combine the complexities of the new revenue recognition guidance with the complexities already existing in your business, you find an increased potential for errors and financial misstatements. Reliance on spreadsheets, manual journal entries, manual account reconciliations, hard copy report distribution, decentralized document storage and version control opens up the possibilities of having several weak links in a very important chain. The reality is that financial organizations are always evolving with personnel constantly in flux.
Thankfully, with the right tool, the days of “doing it all manually” with endless spreadsheets are winding down. Leading companies are no longer willing to put the top line of their financial statements at risk and are turning to automated tools to give them increased visibility, better data for decision-making, and higher levels of confidence that they are fully compliant with all applicable standards.
Here are some of the main benefits of automating your revenue recognition:
In brief, investing in a good revenue automation tool will give you peace of mind and help you lessen your financial risk by establishing consistent data streams and incorporating rule-making efficiency.
Learn how Zuora RevPro can help you automate your revenue recognition and meet the new standards!