Simplified Revenue Recognition in NetSuite for Businesses with Recurring Services

This article is relevant if you seek a simplified NetSuite approach to revenue recognition in non-project-based organizations.

Background

In 2019, I authored an article, Take Control: A Simplified Approach to NetSuite Revenue Recognition and Cost Amortization, presenting a viable alternative to NetSuite’s Advanced Revenue Management for entities operating on a project basis.  This is a great solution — yet we had a client in a different industry who needed a solution.

Our client is in the waste management sector, delivering both recurring and one-time trash removal services. Utilizing an industry-specific solution known as “Soft-Pak,” they aimed to leverage NetSuite for their general ledger and accounts receivable functions.

With data integration in mind, Soft-Pak efficiently generates detailed line entries, facilitating the creation of NetSuite invoices tailored for general ledger implications. Additionally, each line entry carries a service date, pinpointing when revenue is recognized. This granular data suffices for crafting a precise financial representation.

Revenue Recognition: The Interplay of Service Dates and Accounting Periods

NetSuite’s built-in invoice functionality generally directs revenue straight to the income statement (depending on your item configuration general ledger pointer). Yet, these invoices also contain line-level service dates, marking the exact juncture when revenue is earned.  This more refined data allows for a more surgical approach to financial reporting, transcending the limitations of standard configurations.

Consideration for Revenue Recognition with Service Dates and Accounting Period Dates

NetSuite’s default invoice transactions are engineered to channel revenue directly to the income statement. Yet, because each invoice contains a custom service date that signals the point at which the revenue was actually earned, we open the door for accurate financial presentation.

Here’s the algorithm to consider:

1. Service Date Within Accounting Period: When the service date aligns with the accounting period in which the transaction occurs, the income statement accurately reflects the earned revenue. No adjustments are necessary.
2. Service Date Post-Accounting Period: Should the service date occur after the transaction’s accounting period, it signals unearned revenue. In the case of our waste management client, their billing system operates on a cycle that allows us to identify service components falling mid-month. This enables us to quantify amounts to be recognized in future periods. These sums should then be reclassified from the income statement to the liability section of the balance sheet.
3. Service Date Preceding Accounting Period: If a service date falls before the accounting period, an unbilled asset is in play. This typically occurs when an invoicing system generates an invoice for the next accounting period, but the service was actually rendered in the current one. In this scenario, revenue amounts should be moved from the income statement to the asset section of the balance sheet.

By adhering to this algorithm, one ensures a financial presentation that is both accurate and compliant, allowing for seamless integration with external operating systems — like the one used in the waste management industry. The key is to have line-level service dates. This pattern is often expressed in organizations that produce recurring billing.  Click images to get a feel for the transactions.

Automating Period-Based NetSuite Reclass Entries

With the algorithm in place, we laid the foundation for an automated reclassification system. This stands in contrast to NetSuite’s Advanced Revenue Management (ARM), which necessitates individual journal entries for each invoice; we simply think that is too heavy and drives up transaction line counts, possibly forcing us to another infrastructure tier.  Here’s the optimized methodology we deployed:

1. Automated Nightly Period Analysis: A NetSuite scheduled (map/reduce) script runs nightly, scrutinizing all open accounting periods.  It aggregates all invoice transactions—along with credit memos and other applicable documents—pertaining to each accounting period and categorizes them based on the service date scenarios previously outlined.
2. Intelligent Month-End Reversing Entries: This nightly routine auto-generates a single reversing journal entry at month-end to shift amounts from the income statement to the balance sheet. Leveraging NetSuite’s reversing entry function, the reclassification effects are automatically nullified in the subsequent period. The entry is clearly marked to distinguish it from generic journal entries and can be updated nightly based on transactional activity.
3. Audit-Ready Support Files: To validate the integrity of the summary reclass entry, detailed supporting documentation is essential. Rather than creating a custom table, we chose to store a CSV file in NetSuite’s file cabinet, offering Controllers an opportunity for review and verification.
4. Month-End Financial Integrity: Operating as part of the ongoing nightly routine, the reclass entry is subject to scrutiny by Controllers during their month-end close procedures. Upon finalizing the books, both the reclass entry and its supporting documents are locked, ensuring the financial statements are dependable.

This streamlined approach enhances the accuracy of financial reporting while simplifying month-end close procedures.  Click images to get a feel for the auto-generated reversing entry.

NetSuite’s Platform Leads to Efficient and Elegant Revenue Solutions

I extend my gratitude to Sean G., a Senior Business Analyst in Prolecto’s Accounting Practice, who engineered this client-centric solution. Drawing on his five-year-old similar solution for another client, Sean again demonstrated that understanding the fundamentals of business and accounting can circumvent the need for costly add-on modules.

Sean foresaw the broader application of this solution and, therefore, parameterized the script. This flexibility allows it to adapt to fit cost amortization situations, different subsidiaries, or other client environments, all while maintaining the foundational algorithm. It’s simply a matter of setting the right pointers to your specific balance sheet accounts.

This algorithm, like all our intellectual property, is available at no additional charge to our Prolecto clients. We understand that the essence of a valuable professional relationship is in the ability to listen, conceptualize, design, and implement effective solutions. All of our license-free modules, now under the Labs banner, represent client accomplishments and are building blocks to solve challenges.

If you found this article relevant, feel free to sign up for notifications to new articles as I post them. If this article speaks to your challenges around NetSuite revenue recognition or cost amortization and you’re seeking a straightforward approach, let’s have a conversation.

Marty Zigman

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.

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