Features
Part of Gross versus net: what a revenue entry has to decide
Revenue recording problems, sorted by the symptom they cause
Nine revenue recording mistakes grouped by symptom: sales too high, sales too low, months wrong, pipeline treated as sales, and corrections nobody can trace.
Revenue errors are hard to spot because the numbers they produce look reasonable. Nothing fails to balance, nothing is obviously missing, and the sales line moves in a direction you can usually explain to yourself.
The way to find them is backwards, from the report that is lying. There are five things a sales figure gets wrong, and nine ordinary mistakes distributed across them. Work from the symptom you can see to the cause you cannot.
Figures below are invented to show a mechanism.
What to take away
- Start from which number looks odd, not from a checklist. Each symptom has a short list of possible causes.
- Three of the nine are duplications, and duplications are the hardest to see because both entries are individually plausible.
- The single best preventative is recording the delivery date on every sale, separately from the invoice date and the payment date.
Symptom one: the sales total is higher than you know it was
1. The sale counted twice, once at delivery and once at payment.
Why sales read too high
What happened
- 1. Double count
- Payment posted to income
- 2. Two systems
- Channel and bank both post
- 3. Tax in revenue
- Collected gross
What it looks like
- 1. Double count
- Receivables never fall
- 2. Two systems
- Sales beat settlement report
- 3. Tax in revenue
- Profit right, revenue high
2. Two systems posting the same sale. A sales channel writes invoices into the ledger. The settlement report from the same channel is then imported as well, or a bank line for the payout is coded as a sale. Both entries have a date and an amount and a plausible description. Nothing is obviously wrong until the sales figure exceeds what the channel says it collected.
3. Tax collected sitting inside the revenue line. Amounts you collect on somebody else's behalf were never yours. Recorded gross, they inflate revenue by the whole of the collected amount and, because they are then also recorded as a liability, they do not distort profit. So the profit looks right and the revenue does not, which is exactly the combination nobody investigates. How much is collected and how it is reported vary by place and by entity, so check that at the authority rather than copying a treatment from elsewhere, starting from the public guidance on paying business taxes.
Symptom two: the sales total is lower than the work you did
4. Delivered work that was never invoiced.
Why sales read too low
The mistake
- 4. Never invoiced
- Variation delivered, no document
- 5. Refunds netted
- Credit notes against sales
What stays invisible
- 4. Never invoiced
- Unbilled work
- 5. Refunds netted
- Rising refund rate
5. Refunds and credit notes netted into the sales line. Reducing the original invoice, or posting a refund straight against the same account with no separate record, leaves the sales figure technically correct and the refund rate invisible. A business returning a growing share of what it sells then sees a flat sales line and no signal at all. Credit notes belong in their own account beside revenue, with their own dates and numbers.
Symptom three: the months are wrong even though the year is right
6. The invoicing run deciding the period.
Invoice date versus delivery date
Timing
- 6. Invoicing run
- Delivery 28th, invoiced 5th
- 7. Deferred release
- Released on billing schedule
Effect on the month
- 6. Invoicing run
- Sale in wrong period
- 7. Deferred release
- Three empty months, one full
7. Deferred income released on the billing schedule instead of the delivery schedule. Money taken up front is released into revenue as you deliver, and the two schedules are only the same if you happen to bill in step with delivery. Billing quarterly for a service delivered monthly and releasing at each bill produces three months of nothing and one month of everything, which is not a picture of anything real. Write the release schedule down on the day the money is taken, keyed to delivery. How an advance payment is treated for tax is a separate question governed by the method your books are kept under, described in the federal guide to accounting periods and methods.
Symptom four: the pipeline and the ledger disagree
8. A signed quote or a purchase order treated as a sale. An order is a commitment to buy. It is not revenue, and it is not a receivable, because you have not done anything yet. Recording it as either fills the ledger with work that may be canceled, rescheduled or reduced, and makes the aging report meaningless. Keep committed work where it belongs, outside the books, until something has been delivered.
Symptom five: a correction nobody can trace
9. Backdating into a period already reported. An invoice raised now, dated into a closed month, changes a figure someone has already read and acted on. The new report and the old report disagree, with nothing in between to explain it. Where the period is genuinely still open, date it correctly. Where it is closed, record it now and note why it is late. Never edit or delete a posted invoice: correct it with a credit note or a reversing entry that leaves both documents visible. The general form of that rule is set out in the errors that damage a small set of books.
From symptom to check
| What you noticed | Look for | The check that finds it |
|---|---|---|
| Revenue above what the channel says it collected | 1, 2 | Reconcile to the channel's own settlement report, not to the bank |
| Old unpaid invoices beside a credit balance for the same customer | 1 | Every receipt allocated to specific invoices at the point of entry |
| Profit looks right, revenue looks high | 3 | Tax collected shown as a separate line on every sale |
| Sales flat while activity grew | 4, 5 | Compare the delivery schedule with what was invoiced |
| One strong month between two weak ones | 6, 7 | Sort the month's sales by delivery date, not invoice date |
| Receivables that never age out | 8 | No entry in the ledger without something delivered |
| A report that no longer matches the printed version | 9 | Lock the period after close, and correct with dated documents |
The arithmetic of counting one sale twice
Say a month of genuine sales is 40,000 and three payments totaling 5,000 were posted to income instead of matched to their invoices.
One sale counted twice
- 40,000genuine sales for the month
- 5,000payments posted to income
- 45,000revenue as reported
- 5,000profit overstated
Revenue reads 45,000. Receivables are 5,000 higher than they should be, because those invoices are still shown as unpaid. Cash is right. Profit is 5,000 too high, and the gap that the cash flow statement exists to explain has grown by 5,000 for a reason that is not in the business.
Three numbers moved and only one of them, the aging report, looks obviously wrong. That is why the check for this error is the aging report rather than the sales line: chasing a customer who has already paid is the loudest thing this mistake does.
What prevents most of it
Two habits, neither of them onerous.
Record the delivery date on every sale, in its own field, and use it to decide the period. That alone prevents mistakes six and seven and makes four findable.
Allocate every receipt to specific invoices when you enter it, using the remittance advice, and never let a payment post to income. That prevents mistake one and makes two visible within a month.
What a sale record must carry, and where the boundary sits between what you can decide and what needs advice, is in the revenue recording guide. The reports these errors distort are in the accounts receivable overview.
