Gross versus net: what a revenue entry has to decide

A customer signs off a job on 12 March. You invoice the same day. They pay on 8 May. Back in February they sent a deposit. Which month made the sale?

There are three defensible-sounding answers and only one of them is right for your books. Choosing badly here is the most common reason a small business's profit figure quietly tells it something untrue.

What to take away

The decision hiding inside every sale

Recording revenue is not the act of typing a number in. It is a decision about timing: which period does this sale belong to? The account it lands in, which comes from your chart of accounts, the customer record and the tax treatment all follow from that answer.

Two rules compete.

Cash basis says revenue exists when the money arrives. It is simple and unarguable, and it makes your profit and loss statement look like a bank statement with better labels.

Accrual basis says revenue exists when you have done the thing you were paid for. The money can arrive before, after, or never, that is a separate question about cash, not about whether you earned it.

Which basis you may use, or must use, depends on your entity type and size, and it can differ between your books and your tax return. The rules come from the IRS: Publication 538, Accounting Periods and Methods, is its plain-language guide, and the gross receipts test in Internal Revenue Code section 448 limits who may stay on the cash method. Changing method later means filing Form 3115, the application for a change in accounting method. Ask an accountant once, write the answer in your procedures, then apply it without exceptions.

One job, two sets of books

Take the March job. Say it invoices at $6,000, with $1,500 received as a deposit in February and $4,500 received in May. Every figure here is invented to show the mechanism.

Same job, same $6,000, same customer. On cash basis that sale splits across two quarters, far from the month the work happened.

On accrual basis, all $6,000 sits in March beside the costs of that March work. That adjacency is the point: a margin means something only when revenue and its cost share a column.

Look at what May does under accrual: nothing at all to revenue. The payment moves value from one asset to another: out of "owed by customer", into "bank".

If your books show income in March and again in May for that job, you counted the sale twice. That is the double entry point: the payment moves between two assets, and both sides are recorded, as the bookkeeping foundations guide sets out.

Money you are holding but have not earned

Deposits, retainers, prepaid annual plans, gift vouchers, booking fees. Cash in hand, revenue not yours yet. Under accrual each one creates an obligation (deliver the thing, or give the money back), and an obligation is a liability, not a sale.

The release rule is the practical part. You move amounts out of that liability and into revenue as you deliver:

Write the release schedule down on the day you take the money. Reconstructing it at year-end from memory and bank lines is how businesses end up recognizing a year of subscription income in a single December.

What a sales entry has to carry

"$6,000, Acme Ltd" is a number without a story. Six months later nobody can tell whether it was right. A sales record earns its place when it carries:

Sales that run backwards

Revenue is not a one-way ratchet. Four things push it the other way, and they are not interchangeable.

A credit note cancels or reduces an invoice that should not have been raised, or was raised wrong. It is a document with its own number and its own date, and it lands in the period you issue it.

A refund returns money for something already delivered and paid. It reverses revenue and moves cash.

A discount given at the point of sale simply lowers the invoice. A discount given after the fact is a credit note. Keeping settlement discounts out of your headline sales figure is what stops you thinking your prices are higher than they are.

A bad debt write-off is not a sales correction at all. The sale happened, the revenue was real, the customer just did not pay. That belongs in expenses, not as a reduction of revenue: otherwise your sales line silently absorbs a collections failure and you never see it.

One rule sits above all four: never delete a posted invoice. Reverse it, credit it, or correct it with a new document. A deleted invoice takes its own evidence with it, and the gap in the numbering is the first thing anyone reviewing your books will notice.

Gross or net: are you the seller or the middleman?

If a marketplace takes $6,000 from a customer, keeps $900 and pays you $5,100, is your revenue $6,000 or $5,100?

The answer moves your revenue line by fifteen percent without moving profit by a cent, so get it right. The test is the principal-versus-agent test in ASC 606, Revenue from Contracts with Customers, and its international twin IFRS 15. Ask who is actually selling: did you control the goods or service before the customer got it, do you set the price, do you carry the risk if it goes wrong, is the customer yours or the platform's?

If you are the seller, record $6,000 of revenue and $900 of platform fees as an expense. If you genuinely pass someone else's sale through as an agent, only the commission is yours.

When it is close, this judgment affects how your business reads, so take the contract to an accountant instead of deciding from the payout screen.

Where the bookkeeper stops

A bookkeeper can and should decide: which date a delivery happened, which customer an amount belongs to, whether a deposit has been released, whether a payment has been matched to the right invoice. Those are questions of evidence, and the evidence is in the file.

Hand upward the moment the question becomes which rule applies rather than what happened. Contracts that bundle several deliverables at one price. Long projects billed on progress. Anything where the payment schedule and the delivery schedule disagree by more than a month.

Which basis your accounts must be prepared on. Whether an arrangement is a sale or a financing. Those are advice, not recording, and getting one wrong for a year costs far more than one conversation.

If you want a plain-language starting point on managing business finances before that conversation, the U.S. Small Business Administration's Business Guide is a reasonable orientation, but it is not a substitute for advice on your own contracts.

Before you close the month

Common questions