Accounting for Revenue

Happy Monday!  I hope you enjoyed your weekend.  Here in Vancouver it was nice and warm, upper 90’s both days, and it was a weekend with the boys which made it even better.  Did you do anything fun?

Revenues in Small Business

The accounting for revenues in a small business can be a little tricky.  Depending on your industry, sending out an invoice does not automatically make the amount “revenues” under Generally Accepted Accounting Principles (GAAP).  However, for your purposes as the small business owner, sending out that invoice as early as possible can be extremely important for your cash flows.

The 3 Reasons Not to Record the Invoice as Revenue

Under GAAP, revenues and costs are supposed to be matched so that someone outside your business who reads your financial statements – such as your banker when you apply for a loan – can understand your costs in relation to your income.  But there are other reasons to consider not recording some invoices as revenues at the time of invoicing your customer.

  • The Invoice is for a Deposit on Work to be Completed Much Later

At my last Company, we often charged a deposit of 50% to secure time on the master schedule.  Since many of these projects were worth over $20,000, the plan was to ensure the Customer had “Skin in the Game”.  From a cash flow perspective, it was great to get the money in before we had to start ordering materials and parts.  From an accounting perspective, however, we faced several potential issues.

  • Customer wanted to cancel the work

Eventually, a customer cancels the work that they requested.  If you are lucky enough to have the customer cancel in the same month, then there is no problem as the receipt of the money and the repayment happens in the same month and they cancel each other out.  But what if the customer cancels 2 months later?  Your Income Statement looks odd as Month 1 reports all this income and then Month 2 shows either a negative income for that amount or you show some sort of discount or allowance or perhaps you have a refunds account.  If it is only you looking at the financial statement, then it is probably not a problem, but if you have someone like your banker or insurance agent looking, you have to explain, which may cause them to question your accounting. Plus, the risk is your Company spent the money and has to scramble to find funds to repay the deposit. 

  • Labor and materials are not being used on the project for 3-9 months

This is somewhat along the lines of what we discussed above.  In month 1 you record all your income and then month 4 you have all your expenses, you cannot really tell how well you are doing by looking at your financial statement.  If you are trying to run your Company by the numbers, this may cause you to think things are going well in Month 1 and not-so-well in Month 4.  By using some method for project accounting, you can see how well your projects are doing over time, but these will not roll-up to your Income Statement.

  • The Invoice is for Work to be Done Over Time

Think Ongoing Contract like in a gym membership.  Lets say you give your customer a chance to pay monthly or offer a discount to pay in advance for a whole year.  Those who take advantage of the discount are still going to use the gym (well potentially use the gym but that is a different matter) over the next 12 months.  To match up with the members who pay monthly, you may want to make sure that your accounting team keep a different schedule (perhaps in Excel) which tracks who has paid and the charge per month for the year.

Revenues in small business are not always easy.  If you are the only person who will ever look at your books, then you can keep them anyway you want and work with your outside accounting firm at year-end to get the numbers right for tax purposes.  There are benefits to running your books to record revenues when invoiced, but there are perhaps many challenges to this as well.  Talk with your accounting professional for advice on the best way for your business.

If you have questions and would like a free, no obligation consultation, write me using the contact form below and we can have a conversation about your concerns and how to address them.

Have an awesome Monday.


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