Someone asked me the other day, why do I need software for revenue recognition?
If I sell a 12-month subscription, don’t I just take the subscription price, divide it by twelve and recognize the amount in each month?
My response, as it always is for any complex (and especially one posing as simple) question: ‘Maybe.’ Sometimes all you would need to do, from a computation perspective, could be just that.
For example, your client pays you $24,000 upfront for one day of consulting each month of a year. You divide by 12 and recognize, on an accrual basis, $2,000 a month once you have delivered that day of consulting in each month. In many cases, however, the amount recognized in each month or accounting period could be different.
For example, a consultant billing on a daily rate may have more billable days in January than in February. For revenue recognition purposes, her billings for a multi-month contract will be broken out and computed on a daily basis for each month (or accounting period), and then each period’s amount is recognized within that period. For a multimonth construction project, work could be completed at a different pace within each accounting period. How much is recognized in each period may need to be computed on a percentage of completion basis.