If you own a business, one of the most important things you can do to ensure the financial health of your company is to keep immaculate accounting records. However, to keep proper records, you must understand when to record your revenue. Check out these four possibilities so you can select the one that is best for your business.
1. Proportional Performance Method
Some businesses may need to deliver repeated services to a customer in order to fulfill the sale. For example, if you own a home organization business, you may have a contract to organize multiple rooms for your client over a period of time. You have a couple of different options to properly account for this situation.
If the services that you provide are the same, you can recognize revenue evenly across each event. For example, if a customer is paying $2,000 and you expect that five identical appointments are required to fulfill the contract, recognize $400 in revenue after each appointment or event.
In cases where the services provided are not the same, recognize the revenue based on how much is earned at each appointment or event. This alternative for revenue recognition takes into account the complexity of the services provided for each event.
2. Completed Performance Method
The completed performance method does not recognize revenue until a contract is completely fulfilled. In same cases, your contract requires multiple steps, but the job is not considered complete until the entire project is complete. For example, if you own a moving company, you must box up, transport the boxes to your truck, drive the truck to your customer's destination, and unload the truck. Even though there are multiple events, you do not earn revenue until the job is completely done. Once the job is complete, you recognize the revenue from the job.
3. Specific Performance Method
If you provide customers with a specific service, you recognize the revenue after the service is complete. For example, if you have a client who periodically requests that you write website content, account for the revenue when the content is submitted and approved by the client.
4. Collection Method
The collection method of revenue recognition does not recognize revenue based on when the service is rendered. Instead, you do not recognize revenue until you receive payment for your services. If there is considerable uncertainty concerning whether or not your customers will pay, the collection method is a fiscally conservative means of recognizing revenue.
With a bit of research, you can select the revenue recognition method that makes sense for your business. Whichever method you opt for, make sure you use it consistently. Your books will be a mess if you constantly switch methods. By sticking to the proper method, you can keep accurate financial records. For help, contact a revenue recognition service.