Revenue recording: 6 details small businesses miss

The biggest change in this area is easy to state. Businesses used to receive payments. They now mostly receive settlements, and a settlement is not a payment: it is a bundle of several things netted together by somebody else and paid across as one figure.

Everything else described as new follows from that, or from the second change beside it: a growing share of what businesses sell is delivered over time rather than handed over once.

The six details

Six details of revenue recording run through everything below. In order:

The worked example further down uses invented figures to show the mechanism. The figures you actually reconcile are the ones in the platform's payout report.

What to take away

What is inside a payout

One deposit can contain six different things, and only the first of them is your sale. The platform may also report the gross to the IRS on Form 1099-K on its own account, without adjusting for the fees and refunds it netted off, which is one reason the gross matters. The federal tax guide for small business is where to check what that means for your own filings.

Suppose a settlement arrives for 8,300. Customers paid 9,000, the provider deducted 620 in fees, one refund of 400 was netted off, and 320 was held back and released later. Coded as a sale, that becomes 8,300 of revenue, no visible fee, no visible refund and no record of the amount still owed to you.

Coded properly it is 9,000 of revenue against the delivery dates, 620 of cost, a 400 reversal, and 320 recorded as an asset until it is released. Your profit is very nearly the same either way. Your ability to see what the channel costs you, and whether refunds are rising, is entirely different.

The practical rule that follows: reconcile to the provider's own payout or settlement report every period, not to the bank line. Stripe, PayPal, Shopify Payments and Amazon each publish one, and each breaks the deposit into its parts. The bank knows one number and it is the least informative of the six.

Delivery over time makes the schedule central

Subscriptions, retainers, support plans, licenses, memberships, prepaid usage. In all of them the money arrives at one moment and the delivery happens across many, so revenue has to be released in slices as you deliver.

What has changed is the volume. A business with a handful of annual plans could reconstruct the position at the year end. A business with hundreds of overlapping start dates, upgrades, downgrades and mid-term cancellations cannot, and the reconstruction is not a slow job so much as an impossible one.

So the schedule stops being paperwork and becomes the record. Write it when the money is taken, keyed to delivery, not billing. Reconcile its remaining total to the deferred income balance every month.

None of this is house style. Revenue is recognized when, or as, control of what you sold passes to the customer: that is the rule in ASC 606, Revenue from Contracts with Customers, and in IFRS 15 for reporters outside US GAAP. The release schedule is simply that rule applied contract by contract.

If the two disagree, one was changed without the other. The mechanics of holding money you have not earned are in the revenue recording guide.

Usage based pricing adds one more wrinkle worth naming: the amount earned is not known until the period has run, so the entry depends on a measurement made outside the ledger. Whatever produces that measurement is now part of your books, and it needs to be as reproducible as anything else.

When somebody else pays you before the customer does

A growing number of arrangements put a third party between you and your customer: the customer takes an installment plan, and you are paid up front less a charge. Buy now, pay later providers such as Klarna, Afterpay and Affirm work exactly this way.

The recording question is who owes you what. Once the intermediary has taken on collection, your receivable is usually from them, not the customer.

The deduction they take is a cost of selling, not a discount. Whether an arrangement works that way depends on the contract, so read it rather than infer from the payout screen.

The consequences for your aging report are real. Chasing a customer who has already been settled by a third party is the kind of error that costs a relationship.

Automatic matching and the confidently wrong match

Matching payments to invoices used to be manual and slow. It is now mostly automatic and fast, and the failure mode has changed with it.

The old failure was an unmatched payment sitting in a list: visible, annoying, and dealt with.

The new failure is a payment matched to an invoice of the same value that it does not pay. The bank reconciles and the customer's total balance is right, but the individual invoices are wrong. The aging report says one invoice is overdue and another settled; both statements are false.

Nothing in a trial balance detects this, but asking customers, at least the largest ones, to confirm what they think they owe does. Do that periodically, not after something goes wrong.

That check, agreement with a record produced by somebody else, has always proved a set of books, and what it protects is set out in the accounts receivable guide.

Small cross border sales, in more currencies

Selling in several currencies used to belong to larger businesses. It now arrives with the first online sale.

Set up two things before it matters. Choose one rate source and date, write it down, and apply it consistently. Keep separate accounts for each currency you hold, each reconcilable to its own outside record.

Tax and reporting rules vary by place and entity. In the US, most states' marketplace facilitator laws put the sales tax on the marketplace that made the sale rather than on you, and income tax follows the IRS rules for the entity you chose. Confirm both instead of copying a convention from elsewhere, starting with the IRS guidance on paying business taxes.

What has not changed

Worth saying, because the surface moves fast enough to suggest the foundations have.

Delivery still decides the period, not payment or invoice, and money held for work you have not done remains a liability. Tax collected for someone else was never yours, and a posted invoice is never deleted, only credited or reversed.

Whether you are the seller or an agent passing a sale through is answered by the contract, not the payout.

The errors that follow from forgetting any of it are cataloged in the piece on the sales figures that quietly lie. The process measures that catch them early are in the checks that show whether a sales figure can be trusted.

Common questions