Accounting revenue recognition is an important part of accrual accounting. Understanding recognition is simple when you learn about accrual accounting and the need for balancing your income statement for financial knowledge. Here, we describe how accrual accounting plays an important role in the financial management of your business and discuss how this recognition is performed according to the available standards:
Accrual accounting is the financial practice of accumulating different expenses and profits over a fixed period. It often employs the use of accounts payable and receivable based on the currently available financial information. It usually covers the balance sheet elements for a fiscal year and often includes the recording of expenses and profits, before they are received from the clients.
One of the problems handled by accrual accounting is that of accounting revenue recognition. It is often required because contracts often run for great lengths, where companies may not exchange compensation and the rendered services at the same time. A normal practice is to recognize the revenue once a good or a service is delivered to the client based on the details of the contract.
Similarly, the recognition may also include the expenses that the company faces due to this transfer of goods and services. If a company must pay a salesperson a commission based on a successful contract, it is also mentioned as an accrued amount in the year, where the transfer occurs between the customer and the business entity.
Accounting revenue recognition is necessary for financial compliance. With the shifting to new recognition standards of ASC 606/IFRS 15, you get the following benefits:
The use of the latest revenue recognition standards allows an entity to make sure that they can remain compliant in international operations. The presence of the common ASC 606 now allows your entity to remain financially compliant in around 120 countries. This is an excellent step towards creating a globally acknowledged financial management practice in your business.
Improved Financial Planning
The use of good accounting revenue recognition practices is excellent for improving the current financial planning in your business. The performance management is also enhanced in your entity since you have complete information about the status of long-term contracts. With more disclosure available to the stakeholders, Strong decisions are possible for the business.
IFRS Revenue Recognition
The International Accounting Standards Board (IASB) uses the IFRS (International Financial Reporting Standards) to perform accounting revenue recognition. It follows the critical event approach. It recognizes that transfer of the rewards and the risks from the seller to the buyer of the goods and services.
The standard like IFRS 15 also mentions when the payment is collectible as an assured amount due to the transfer of the sold goods and services. This allows the measuring the revenue with accuracy and ensuring that the cost of sales can be properly recorded in the income statements of the entity. The main point behind accounting revenue recognition is to identify the delivery of performance of an entity and then produce the desired accounting record according to the applied compensation.
Automating accounting revenue recognition is possible by using RevSym from CallidusCloud. We understand the needs of your business and help you use a cloud solution that guarantees ASC 606 compliance.
Webinar: Accounting for Commissions and Other Contract Costs under ASC 606
In this webinar, Matt Svetich of Effectus Group will discuss what to consider when preparing for the commission accounting changes under ASC 606 and ASC 340-40.
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