What is Revenue Recognition?
Revenue is one of the most crucial parts of any business, and it is especially important for new entrepreneurs just starting out with a business venture. But beyond generating revenue from your products or services, the revenue recognition process needs just as much attention and precision for accounting.
It’s only sometimes a straightforward procedure, however. A report from the Journal of Accountancy highlights that many challenges and concerns arise when recognizing revenue, such as assessing associated risks, understanding contracts, applying ASC 606, and evaluating management’s process for developing estimates. As such, it’s critical to be aware of revenue recognition and what it means for your business, ensuring that you report and comply correctly to avoid any hitches in your accounting. Here’s a guide to revenue recognition and why you should know about it:
What is revenue recognition?
Revenue recognition is an accounting principle that dictates when a business can recognize and record revenue in its financial statements—regardless of when cash is received. Revenue is usually recognized when a product or service is delivered to a customer. The Balance details how companies can recognize revenue in various ways, often depending on the goods or services offered. For instance, the sales basis method recognizes revenue at the time of sale, a more straightforward procedure that makes sense to investors and works for smaller businesses.
However, companies that build infrastructure like bridges or vehicles, like airplanes, may take years to deliver their products, so they can recognize revenue through the completion percentage to show investors that the business is earning money. Financial statements may look different depending on the revenue recognition method, but all reflect the company’s financial condition.
Why understanding revenue recognition matters
Revenue recognition plays a role in various financial aspects of your business. Forbes’ tips on an early-stage company’s accounting notes that revenue recognition can help with revenue accruing.
If you record accounts receivable, you can track what is owed to you, how long they’ve owed you, and if you need to remind someone for payment. If you’re a new entrepreneur or flying solo, this can boost your organization and make accounting more efficient.
Accurate revenue recognition also ensures you provide an accurate picture of your business’s financial health and performance through financial statements. This information can influence investor decisions, so your statements should portray accuracy and profitability. Another critical way revenue recognition impacts your business is by allowing you to comply with standards.
Accounting standards, such as ASC 606 in the US and IFRS 15 internationally, dictate how revenue recognition should be carried out. Following these standards ensures your company complies with regulations for smooth and accurate accounting.
New solutions for revenue recognition
Revenue recognition can be tricky, especially if you’re new to the business world or are adapting to life as an entrepreneur. Fortunately, there are new solutions to guide you through revenue recognition and other money matters to ensure money is flowing efficiently. Revenue recognition solutions from Softrax showcase how software can automate the process, managing even the most complex components. Automation can boost efficiency in your accounting, eliminating the need for manual procedures that can be prone to error and time-consuming. Instead of focusing on revenue recognition techniques, you and your team can spend more time developing the business.
An efficient accounting system can also improve the flow of money within the company and its employees. For instance, food service industry businesses like restaurants can use finance platforms like RASI, which processes annual accounts payable across thousands of clients and payroll checks for employees. This process ensures revenue is used efficiently, from saving costs to paying workers accurately and on time.
Revenue recognition is vital for new entrepreneurs to monitor their companies’ financial performance and ensure business success. Whether new to the business world or starting a new venture, learning about money management is helpful at any career stage.
Discussions with other financial and accounting professionals and business owners in our networking groups, like Business Executive Networking Group (BENG) can provide rich conversations and new networking connections.
