Overview - Revenue Recognition
Note: This feature is supported for only certain plans of Zoho Books. Visit our pricing page to know if this feature is available in your current plan. You can reach out to our support team at support@zohobooks.com for further assistance.
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 organizations often receive upfront payments. However, the services are delivered over days, weeks, or years. If the full amount is recognized 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 recognize its revenue.
Both these standards follow the same core idea: Revenue should be recognized 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.
- Recognize revenue when each performance obligation is satisfied.
Zoho Books applies these principles to ensure revenue is recognized 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 recognize 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 recognized 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 Recognized 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.
Insight:
What Is a Deferred Revenue Account?
The Deferred Revenue account records the amount you’ve billed but not yet earned. This applies when:
- Customers pay upfront for products or services
- Services are delivered over a future period
What Is a Recognized Revenue Account?
The Recognized Revenue account records the revenue portion earned for the current period. As the service is delivered over time, Zoho Books:
- Moves the applicable amount from Deferred Revenue
- Records it under Recognized Revenue
Scenario:
Zylker, a software startup, enables Revenue Recognition in Zoho Books. The company sells an annual software subscription for $12,000 and bills the full amount upfront.
On January 1, the customer pays $12,000. Since Zylker has not yet delivered the service, Zoho Books does not record this amount as income. Instead, it records the payment in the Deferred Revenue account as a liability.
Zylker provides software access throughout the year. Based on its configuration, revenue is automatically recognized over the subscription period.
Each month:
- $1,000 ($12,000 ÷ 12 months) is debited from Deferred Revenue
- $1,000 is credited to the Recognized Revenue account This process continues for 12 months. At any point, Zylker can know how much revenue is earned, how much is still unearned, and their true financial performance.
Enable Revenue Recognition
Warning: Once enabled, you cannot disable this feature in your organization.
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 organization. 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.
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