The Importance Of Revenue Recognition
The principle of ‘revenue recognition’ has long been the domain of the Finance department, but it has such a major impact on the overall success of a business that when it is not properly adhered to or managed it not only hits the balance sheet, it can also make front page news.
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Lets quickly take a step back and clarify for any non-finance readers, the revenue recognition principle “Is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognised.”
This is of direct importance for professional service firms who should only recognise their revenues when services are rendered no matter when payment is made. This differs from cash accounting, where revenues are recognised on payment and not where goods and services are sold.
What this means is that organisations need to carefully manage two types of accounts for revenue recognition:
- Accrued revenue: Revenue is recognised before cash is received.
- Deferred revenue: Revenue is recognised after cash is received.
An inconsistent approach to revenue recognition will impact on profits, and reputation. Recent events with such high profile names as. Tesco have really highlighted the importance of Revenue Recognition and the consequences of poor Corporate Governance in Executive Management ensuring that there is a renewed focus for:
- Organisations adherence to the rules and standards expected of them
- Sound Financial Policies endorsed by the Board
- Financial Policies being implemented effectively
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How Deltek Maconomy Can Assist With Ensuring Implementation Of Financial Policies For Services Firms
For project-based firm’s who sell their people’s time and are rendering services, strict adherence to Revenue Recognition principles is essential. Deltek Maconomy is purpose built for the needs of such organisations and is configurable to deal with Revenue Recognition in many ways especially when it comes to Project Accounting.
Revenue can be recognised at cost or selling price based on any of:
- The recording of time against a Project
- Invoice creation
- % of Project work done
This means that you can rest assured that your Company Financial Policies are being effectively implemented, your balance sheet is in order and you are not at risk of any potentially damning headlines.
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