Revenue recognition
This topic describes revenue recognition and related terms. Use revenue recognition to simplify your accounting and to generate financial reports. To create revenue reports, see Revenue waterfall, Revenue journal, and Monthly recurring revenue.
Terms
- International Financial Reporting Standard (IFRS): A set of accounting rules for the financial statements of public companies. These rules ensure that financial statements are consistent, transparent, and comparable around the world.
- Cash accounting: Financial accounting method that records revenue on payments received.
- Accrual accounting: Financial accounting method that enables a company to record revenue before receiving payment.
- Monthly Recurring Revenue (MRR): The total predictable revenue generated by your company normalized into a monthly amount.
Overview
Accounting standards have two primary methods to manage the revenue earned by a company, these are as follows:
- Cash accounting: Revenue is accounted for as payment is collected. Cash flow directly relates to transactions in the company's book. This is popular among small businesses because it is not complex and does not require any particular rule for the revenue records.
- Accrual accounting: Revenue and expenses are accounted for when the invoice is issued, or when customer obligations are satisfied. This means that a business does not have to wait until payment reaches their bank account — the business can work with predictable revenue. In the US, business with more than 25 million USD in revenue, and public traded companies must use accrual accounting. The accrual method is IFRS compliant.
Methodology
Rebilly distinguishes two types of revenue. These are one-time sales and subscriptions.
One-time sales
One-time sales are order items that do not have a recurring plan. The issued invoice can contain one-time sales and other types of revenues. The recognition date is the issue date of the invoice that contains the one-time sales order.
The following is an example of the recognition system for a one-time sales order:
Jane purchases a product from your catalog on 2022-11-03. The invoice is issued for the same date, the revenue is allocated for 2022-11.
| Issue date | Amount | Recognized November | Recognized December |
|---|---|---|---|
| 2022-11-03 | 20 USD | 20 USD | 0 USD |
Subscriptions
Subscriptions are order items that enable a recurring plan. The revenue is distributed over the subscription service period. The following are examples of the recognition system for a subscription:
- Example 1: John purchases a monthly subscription valued at 20 USD per month. The first invoice bills the period from 2022-04-15. to 2022-05-15. The revenue is recognized as 10 USD for 2022-04 and 10 USD for 2022-05. The second invoice bills the period from 2022-05-15 to 2022-06-15. In this case, the revenue is recognized as 10.32 USD for 2022-05, counting 16 days over a 31 day period and 9.68 USD for 2022-06, which is the remaining amount.
| Issue date | Amount | Recognized May | Recognized June |
|---|---|---|---|
| 2022-05-15 | 20 USD | 10 USD | 10 USD |
| Issue date | Amount | Recognized June | Recognized July |
|---|---|---|---|
| 2022-06-15 | 20 USD | 10.32 USD | 9.68 USD |
- Example 2: Bobbie purchases a year long subscription worth 200 USD on 2022-05-01. The billable period is 2022-05 to 2023-05. The allocated revenue is described in the following table:
| Recognition period | Recognized Amount |
|---|---|
| 2022-05 | 16.67 USD |
| 2022-06 | 16.67 USD |
| 2022-07 | 16.67 USD |
| ... | ... |
| 2023-04 | 16.63 USD |
Reports
Use revenue reports to manage the revenue status of your company and to understand how your business is evolving. Rebilly financial reporting includes waterfall views and Monthly Recurring Revenue (MRR) reports.
Revenue waterfall
The revenue waterfall report describes revenue that is recognized up to a given month. It contains information on booked revenue, recognized revenue for the months in the issued period, and the remaining revenue up to the selected month. To create revenue reports, see Revenue waterfall.
Revenue journal
The revenue journal is a detailed revenue waterfall report, which describes revenue that is recognized at a certain month, aggregated by product ID, product accounting code, or plan ID. It contains information on booked revenue, recognized revenue for the aggregation field in the booked period, and the remaining revenue up to the selected month. To view revenue audit data in a revenue journal report, then select a month.
To create revenue reports, see Revenue journal.
Monthly Recurring Revenue Report (MRR)
The MRR report displays information on the predictable recurring revenue for your business over a period of months. It displays detailed information on the following:
New MRR: Revenue from new customers. This is the revenue from the first recognized invoice. Example: A new customer purchases a year long subscription for 120 USD, with a service period from 2022-05-01 to 2023-04-30. The revenue is classified as new MRR for 2022-05, and MRR for the remainder of the active service period.
Churn MRR: Revenue that is lost due to customer payments going to zero. The customer does not have active subscriptions.
Contraction MRR: Loss of revenue due to a change of plan or downgrade by active customers. Example: A customer changes from a monthly subscription of 10 USD to a year long subscription of 100 USD. The MRR is contracted by 1.67 USD.
Expansion MRR: Increase of revenue due to a change, addition, or upgrade of a subscription by present customers. Example: A customer with a 10 USD per month plan purchases an add-on which is valued at 3 USD per month. The expanded MRR is 3 USD.
Reactivation MRR: Revenue generated in the current month by customers that had active subscriptions in the past.
To create MRR reports, see Monthly recurring revenue.
Export revenue recognition data
To download revenue recognition data for further analysis using your own tools, see Data exports.