The revenue recording questions that keep coming back

The straightforward sale is easy: you delivered something, you invoiced it, the money came. What takes the time is the ten percent that does not fit, and those are the revenue recording questions that keep coming back.

Two questions settle most of it: have you done the thing yet, and is the money yours to keep? Where a case turns on the contract rather than on evidence you hold, the rule that decides it is named below rather than waved at.

Figures are invented where they help show a mechanism.

For customer contracts, the standard US businesses follow is ASC 606, issued by the Financial Accounting Standards Board. Its core principles of ASC 606 run through five steps: identify the contract with the customer, identify the separate performance obligations within it, determine the transaction price, allocate that price to the obligations, and recognize revenue as each one is satisfied. Almost every case below is one of those five steps in disguise.

What to take away

Money in the door before the work

We took a deposit and the customer canceled. We are keeping it.

Release it out of the liability at that point, with a note of what triggered the release. The date that matters is the date the obligation ended, not the date the money arrived.

A retainer covered ten hours a month and only six were used. It depends on what the customer bought. If they bought availability for the month, you delivered it, and the whole retainer is earned whether or not they called. If they bought ten hours that roll over, you have delivered six and still owe four, so part of the money remains a liability. The contract answers this, not the timesheet.

Nobody redeemed the gift vouchers we sold. Each unredeemed voucher is an obligation you still hold. Whether, when and how an obligation that has probably expired can be released turns on two things: the expiry terms you wrote, and the state unclaimed property law, also called escheat, of the state where the holder is. Escheat can take a stale voucher balance long before you would write it off. Keep the balance visible and note the expiry date of each batch.

We invoiced the whole year up front for a service delivered monthly. Invoicing is not delivering. Raise the invoice, recognize a receivable, and hold the amount as deferred income, releasing a slice each month as you deliver. For tax, advance payments have their own rules under IRC Section 451 and the regulations under it, so confirm the treatment before assuming the books and the return agree. The temptation to treat the invoice as the sale is strongest here, because a document exists and looks final.

Partial and interrupted delivery

A fixed price job is half finished at the month end.

Take a job priced at $60,000 with a cost budget of $40,000. If $15,000 of cost has been spent by the month end, that is 37.5 percent of the budget, and the cost method books 37.5 percent of the price, or $22,500, as revenue. Judged 50 percent complete on site, the same job would book $30,000.

The gap is the reason the method has to be chosen before the job starts. Set a floor too. A workable convention is to recognize nothing part way on small jobs, for instance work under $10,000 or under a month, and book those at completion. Pick the method once and apply it to every job the same way.

We delivered part of an order and the rest is on back order. Record what was delivered as revenue against its delivery date. What remains is still an obligation, and if the customer has already paid for it, that portion is still a liability. Invoicing the whole order and calling it done is the error to avoid, because it puts revenue in a month where nothing was delivered.

A job was canceled midway and we billed for work already done. That is a sale, dated to when the work was delivered rather than when the cancellation happened. The billing event is late; the delivery event is what decides the period.

Money that was never yours

We collect a charge on behalf of somebody else.

We recharge costs to clients. Two different situations that look identical on a bank statement. If you bought something in your own name and are recovering it, the purchase is your cost and the recharge is your revenue: both go through the books at their full amounts.

If you paid on the client's behalf as an agent, with the supply made directly to them, you are handling their money rather than trading. Which one applies depends on the contract and on who the supplier contracted with, and that is a question to settle before the coding, not after.

A customer paid us more than the invoice. Record what arrived. Apply what matches the invoice, and leave the excess visible as a credit on the customer's account, which is money you owe back or will apply to a future invoice.

It is not income, and spreading it across old invoices to make the ledger tidy is how an accounts receivable report becomes untrue in both directions at once.

Sales that go sideways

We traded services with another business instead of paying each other.

For tax, the trade is reported at fair market value, and a barter exchange reports the value of its members' trades on Form 1099-B. Flag the exchange statement, because the value both sides agree is what gets recorded.

We gave stock away as samples. No revenue, because nothing was sold. What you have is a cost: the stock has left and been consumed for a purpose, usually promotional. Where that cost is recorded, and whether anything else follows from giving goods away, is worth confirming rather than deciding by analogy.

We offered a discount for early settlement and the customer took it. The invoice was raised at the full amount, and the discount is a reduction taken later. Recording it separately, rather than reducing the original sale, is what lets you see what settlement discounts are costing you over a year. Keeping it out of the headline sales figure also stops you believing your prices are higher than they effectively are.

We invoiced in a currency that is not ours. Record the sale in your reporting currency using a rate for the date the sale happened, and record the customer's balance in the currency you invoiced. When they pay, the amount that lands will rarely match, and the difference is not a change to the sale: it is a separate item arising from the movement between the two dates.

Name the source and the convention once, then apply them without exception. The usual convention is the spot rate on the date the invoice was raised, with unpaid balances restated at the closing rate at each period end.

Under IRC Section 988, the exchange difference on a foreign-currency invoice is a separate gain or loss, not an adjustment to the sale. The IRS publishes yearly average currency exchange rates for tax purposes, and the US Treasury publishes quarterly reporting rates of exchange. Whichever source you use, apply it to the same kind of transaction every time.

Is it revenue at all?

Some money that arrives is not trade. Keeping it out of the sales line is what makes the sales line describe the business.

The receipts that turn up most often are these:

The receipts that turn up most often are these:

Each has its own treatment. Tips and service charges collected for staff are wages rather than sales, and the tip credit under the Fair Labor Standards Act and the payroll withholding that follows decide how they are recorded. For the rest, the IRS sets out the income and deduction treatment in Publication 334, Tax Guide for Small Business, and where your entity type changes the answer, that is a question for your accountant rather than for the coding.

None of them belongs in the same account as what you sell. The five account types and where each lands are in the chart of accounts guide.

When to stop and ask

Send it upward when the contract, not the delivery record, holds the answer.

The cases that turn on the contract rather than the delivery record are these:

The rest are evidence questions, and evidence questions are yours. The distinction and what it costs to get it wrong are covered in the revenue recording guide.

Common questions