This article is relevant if you use QuickBooks and you are challenged performing revenue recognition practices.
Revenue Recognition Background
If you are reading this, I can almost assume you are an accountant. I have a degree in Accounting and started my professional career at Deloitte & Touche where I earned my Certified Public Accountant license. I only hear about revenue recognition concerns from the accountants. Most business people who are sales oriented are frustrated by the concept and I will explain why.
Today, with the “subscription economy”, we are seeing more and more revenue recognition accounting concerns. Let’s consider the example of salesforce.com who offers their cloud based services via subscription. While they like to quote the service by the user and by the month, they generally collect their subscription fees annually. Let’s consider that the subscription is $12,000 for the year.
This means the following at the time the customer commits:
- Sale: $12,000 (business people are happy – high five!)
- Revenue Earned: $0 (the accountant says no revenue – bummer.)
You see, we accountants like to say that revenue must be earned when we have delivered the goods and services to the customer. Revenue recognition principles occur when we collect monies up front before we deliver on our promise. In our example, salesforce.com will be delivering service over the course of 12 months. Hence, the passage of time is the factor we use to recognize revenue earned.
To properly account for the transaction above, we book $12,000 to “Deferred Revenue” on the balance sheet as a liability. As we earn the revenue, we credit Income and we debit deferred revenue. Each month, for the next twelve months, we will earn 1/12th of the sale or $1,000. This is a basic accrual accounting practice.
Revenue Recognition Pain in QuickBooks
We have great clients that have produced new cloud-based services. They have graduated from startup-mode to advanced growth. This means that they finally figured out what the market wants and they are selling their services successfully in rapid fashion.
The defacto standard for tracking accounting in startup companies is to use QuickBooks. However, QuickBooks does not have built in revenue recognition. No worries though. Just build an Excel spreadsheet to help it along. So for every sale, a schedule is created that tracks the subscription start date, end date, contract amount, daily (or other factor) revenue earned rate. The sheet usually gets complex because the amount of revenue that has been recognized is tracked as well as the amount to book each period.
For two of our clients, the breaking point was when they had 200+ customer contracts on that spreadsheet. The basic way that most people track deferred revenue and perform revenue recognition in QuickBooks is by using the memorize journal entries feature. Each month, the accountants will create a journal entry to account for revenue earned. When you have hundreds of journal entries, this becomes cumbersome, slow, and error prone.
Life isn’t static. Generally, the subscription customer will need to add on services mid-term. This means that your revenue spreadsheet needs to be updated and adjusted to account for the change order and you need to make adjustments to the related memorized QuickBooks journal entry. Indeed, keeping all of these structures under control begins to consume too much time.
At this point, a better accounting system is desired and teams like ours become valuable.
Getting Off QuickBooks and on to NetSuite
NetSuite is strong in revenue recognition accounting. NetSuite itself uses their own software to drive and account for their subscription service. The tool offers a number of different ways that you can setup revenue recognition via templates that are based on what you sell. Each template describes the rules that drive the deferred and earned revenue calculation automatically.
During a NetSuite implementation with revenue recognition, there is setup required to get the Excel spreadsheet data to fit right within the new accounting system. Like any type of implementation, the cutoff handling and setup of sub ledgers is tricky. You simply don’t put in opening balances and say you are done.
In NetSuite’s case, it is usually better to setup all of your customer contracts and related revenue templates from their inception. You use NetSuite’s built-in data import tools to pull in the schedule electronically. We always do this in a development environment first because you are sure to pollute the accounting system as it takes a few tries to work out the kinks.
The idea is that you want to have NetSuite perform all of its automatic revenue earned calculations up to the current accounting period. This allows you to see that it is indeed producing the results you are expecting. This sounds simple in practice. But remember we mentioned those change orders? They too need to be properly analyzed for how they will get installed in the tool historically.
Once you are satisfied that NetSuite is calculating revenue correctly, you then can journal entry out the total effect of those automatic calculations to allow for a more conventional opening or starting trial balance to launch your new system.
Summary
If you are a growing company that is trying to track deferred revenue with Quickbooks, there will be a point that you see the bookkeeping work as insanity. Remember that this is a quality problem. Your company must be doing good things and it is natural to need stronger tools: ‘you earned it’!
If you are looking to get off QuickBooks and would like to learn how we can solve your pain by leveraging NetSuite,
let’s have a discussion.
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
