XU Magazine - Issue 06

Don’t you just divide by 12?

Written by Kamal Varma

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.

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About the author

Kamal Varma

Kamal is Founder of Flowrev, Inc. Flowrev is an easy to use revenue recognition platform that is seamlessly integrated with Xero. Business owners, executives, finance managers, accountants and bookkeepers can utilize the platform to easily implement their company’s or their client’s revenue recognition strategy. Tracking and handling changes is a breeze. Accountants and business managers appreciate the easy to use system that helps them deliver and get near-real time revenue on their financials.