Revenue Recognition

Revenue Recognition determines when a business should record revenue in its financial statements. Revenue should be recorded when a product or service is delivered, not when the payment is received. This ensures revenue is reported in the correct accounting period.

Subscription businesses, SaaS models, and service-based organisations often receive upfront payments. However, the services are delivered over days, weeks, or years. If the full amount is recognised immediately, it records more revenue than what was actually earned and does not reflect the true performance of your business.

Revenue Recognition helps your business match revenue with delivery. This keeps your reports accurate and compliant with accounting standards such as ASC 606 and IFRS 15.

Understanding ASC 606 and IFRS 15

ASC 606 (by the Financial Accounting Standards Board – FASB) and IFRS 15 (by the International Accounting Standards Board – IASB) are accounting standards that define how and when a business should recognise its revenue.

Both these standards follow the same core idea: Revenue should be recognised only when a business delivers goods or services to a customer, and for the amount it expects to receive.

To apply this, ASC 606 and IFRS 15 prescribe a five-step revenue recognition model:

• Identify the contract with a customer.
• Identify the performance obligations in the contract.
• Determine the transaction price.
• Allocate the transaction price to the performance obligations.
• Recognise revenue when each performance obligation is satisfied.

Zoho Books applies these principles to ensure revenue is recognised accurately and consistently. Here’s how:

• Splits revenue over the service delivery period.
• Ensures reports reflect only earned revenue, not upfront payments.

How Revenue Recognition Works

Zoho Books follows the guidelines of ASC 606 and IFRS 15 to help you recognise revenue only when you earn it. When you raise an invoice, Zoho Books does not record the full amount as revenue immediately. Instead, it automatically distributes the revenue across the service period based on your configuration. This ensures revenue is recognised only for the service period.

When you receive an advance payment from a customer, the amount is recorded as a liability in the Deferred Revenue account. This means the payment is collected, but the service is not yet delivered.

As the service is delivered over time, this amount is debited from the Deferred Revenue account and credited to the Recognised Revenue account, reflecting the revenue you have actually earned for that period.

If a customer cancels their subscription and a credit note is issued, the refundable portion is reversed. The amount is debited from the Deferred Revenue account and credited to the Accounts Receivable account.

Enable Revenue Recognition

To enable Revenue Recognition in Zoho Books:

• Go to Settings.
• Navigate to Module Settings, and select Revenue Recognition under General.
• Click Enable Revenue Recognition.

Revenue recognition will be enabled for your organisation. A default revenue recognition rule will be applied automatically when no specific rule is selected. You can also create new revenue recognition rules and set preferences to suit your business needs.

Configure Revenue Recognition Rules

Businesses may recognise revenue differently depending on when services are delivered. For instance, businesses offering instant access to digital services may recognise revenue at the start of the period, while those rendering it gradually, like telecom services, may prefer recognising revenue evenly across the period. Zoho Books lets you create custom revenue recognition rules that match your business model.

To configure a revenue recognition rule:

• Go to Settings on the top right corner of the page.
• Navigate to Module Settings, and select Revenue Recognition under General.
• Click Edit to the right of Default Rule to configure the default rule, or click + Create New Rule to create a new customised rule.
• In the pop-up, fill in the following fields:
  • Rule Name: Enter a name for the rule. For example, End-of-Period Recognition for Consulting Service. Check the Mark as Default option to set this rule as the default.
  • Description: Enter a short note about the revenue recognition rule and how it should be applied.
  • Deferred Revenue Account: Select an account to track the payments received for services that are yet to be rendered.
  • Recognition Frequency: Select how often you want revenue to be recognised. Revenue can be recognised in the following ways:
    • Monthly: The revenue will be recognised every month. This option is preferred by quarterly, half-yearly, or annual subscriptions where services are rendered monthly, such as streaming services, rent payments, or utility bills.
    • Quarterly: The revenue will be recognised every quarter over the service period. This option is useful for services that are delivered continuously but reported or reviewed on a quarterly basis.
    • Yearly: The revenue will be recognised every year over the service period. This is useful for long-term service engagements. For example, a three-year IT support and consulting contract is recorded upfront, but the revenue is recognised each year as the service is delivered.
    • Once: The revenue will be recognised only once. This is useful for services such as a non-refundable onboarding or implementation service that are billed upfront and completed either at the start or end of the contract period. Since the service is completed in one instance, the full revenue is recognised at once.
    • Custom: The revenue will be recognised based on a custom frequency that you define. Enter a number and select whether it applies to months or years. This option is useful for services with non-standard billing or delivery cycles, such as contracts that require revenue recognition every 2 months or every 6 months.

• Recognition Method: This determines how the recognised revenue is calculated.
  • Daily The revenue is recognised based on the actual number of service days. The total revenue is divided by the number of service days and recognised proportionately for each period based on the number of days in that period.

• Evenly Distributed: The total revenue is divided equally across all recognition periods, regardless of the number of days in each period.

• Evenly Distributed (With Prorated Values): The total revenue is evenly distributed across all recognition periods. If a recognition period does not fully fall within a calendar month, the revenue for that month is prorated based on the number of service days.

• Recognition Time: This determines when the revenue is recognised within each recognition period.
  • Period Start - The revenue is recognised at the beginning of each recognition period, based on the selected recognition method.

• Period End - When set to Period End, revenue is recognised only after the completion of each recognition period, based on the selected recognition method.

• Click Save.

Once you configure a revenue recognition rule for your organisation, you can associate it with items.

Associate Revenue Recognition Rules With Items

You can associate revenue recognition rules with items. This rule will be automatically applied to the invoices and recurring invoices created using this item.

To associate a revenue recognition rule with an item:

• Go to Items on the left sidebar and select Items.
• Click + New in the top right corner to create an item, or select an existing item, and click the Edit icon in the top right corner of the details page.
• In the next page, fill in the necessary details.
• Select a rule from the Recognition Rule dropdown. If you do not select a rule, the Default rule will be applied.
• Select a Deferred Revenue Account to record and track advance payments until revenue is recognised.
• Click Save.

Associate Revenue Recognition Rules to Transactions

In scenarios where revenue needs to be recognised differently for the same item, you can apply a revenue recognition rule at the transaction level in an invoice or recurring invoice. Zoho Books will then recognise revenue for that line item based on the selected rule.

Associate Revenue Recognition Rules to Invoices

To associate revenue recognition rules to invoices:

• Go to Sales on the left sidebar and select Invoices.
• Click + New in the top right corner to create an invoice, or select an existing invoice, and click Edit at the top of the details page.
• Click the More icon next to the required line-item, and select Show Additional Information.
• Click Revenue Recognition below the item.
• Select the desired rule from the Recognition Rule dropdown.
• Set the Start Date and End Date. Revenue will be recognised during this period.
• Select a Deferred Revenue Account to record and track advance payments until revenue is recognised.
• Click Save.

Associate Revenue Recognition Rules to Recurring Invoices

To associate revenue recognition rules to recurring invoices:

• Go to Sales on the left sidebar and select Recurring Invoices.
• Click + New in the top right corner to create a recurring invoice, or select an existing recurring invoice, and click Edit at the top of the details page.
• Click the More icon next to the required line-item, and select Show Additional Information.
• Click Revenue Recognition below the item.
• Select the desired rule from the Recognition Rule dropdown.
• Select a Deferred Revenue Account to record and track advance payments until revenue is recognised.
• Click Save.

Track Revenue Recognition

Once the revenue recognition criteria are met, Zoho Books automatically records the recognised revenue in the appropriate accounts. You can track these details in the following ways:

• View Journal
• View Revenue Recognition Details
• View Revenue Recognition Reports

View Journal

You can view all journal entries automatically created for a transaction, including entries for recognised revenue.

To view journal entries:

• Navigate to the transaction’s list page. For example, go to Sales on the left sidebar and select Invoices.
• Select the invoice for which you want to view the journal.
• Scroll down to the Journals tab.

You can view all accounting entries for that transaction, along with the impacted accounts and their corresponding debit and credit amounts.

View Revenue Recognition Details

You can view revenue recognition details from the transaction details page.

To view revenue recognition details:

• Navigate to the transaction list page. For example, go to Sales on the left sidebar and select Invoices.
• Select the invoice for which you want to view revenue recognition details.
• In the details page, scroll down to the Revenue Recognition Details tab.

You can view an overview of the revenue recognition details including the recognised amount, deferred amount, and recognition preferences.

View Revenue Recognition Reports

Zoho Books provides revenue recognition reports that give you clear visibility into recognised and deferred revenue for your transactions.

To view revenue recognition analytics:

• Select Reports in the left sidebar.
• Click Revenue Recognition under Report Category.

The revenue recognition report will be displayed.

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