In the bookkeeping world, there's a little something called the revenue recognition principle. In simple terms, the principle means that a business only recognizes money once the good or service has been provided to the customer. In other words, if you haven't done the job, you haven't earned the money. Here's a grad to tell you more. Subscriptions. If I were to pay a digital app company, I would pay whatever it is, $500 for a five-year license to whatever. They're not going to recognize that $500 right away, they're going to split it up as they earn it. Even though they got the $500 right away, they'll put that into deferred revenue or unearned revenue, and then year by year or month by month, they will chip away at that deferred revenue and recognize it as real sales. I have had clients come to me where it's been such a dog's breakfast and it's so laborious and onerous to figure out how much deferred revenue to take away and recognize revenue every month because they were selling different terms of subscriptions to different people or different businesses at different rates, and so they had this crazy spreadsheet which everybody relied upon and it still required a lot of work at the end of the month. What I ended up doing with them was suggesting or recommending apps that work with QuickBooks that deal with deferred revenue and revenue recognition of subscriptions. If a client was not recognizing revenue correctly, I don't even know how to answer that, what would be the repercussions that they may face? Well, one of the things that they could face is that if they ever get audited by the RS or whatever, and they go through their schedules of deferred revenue and their method for amortizing it, let's say and recognizing it into revenue, if they ever got audited, they could have penalties and interest, and they'd have a reassessment of their taxes and it can be really messy and costly. On a smaller scale, if they weren't audited by the government but they are not doing a great job at recognizing the revenue, all kinds of things could get messed up. They wouldn't have a clear picture of what their profitability is from period to period, and they might even mess up on when to approach their clients or customers for renewals of their contracts. They could actually lose money. I had this one client that was a concierge, the clientele was wealthy people and they sold hours of work in blocks of 50 hours. They needed to know when the 50 hours was almost up so that they could reach out to their clients and say, "Hey, your block of 50 hours is almost used up, wouldn't you like to renew with us bla, bla?" If they were to mess up on the deferred revenue being recognized as real revenue, sure, their profit and loss would be messed up. If they were doing job costing, they wouldn't know which clients were profitable clients and which ones to stop doing business with or if maybe they should change their prices, so, they wouldn't know that plus, they actually run the risk of giving away hours for free after the 50 hours were used up, and then they'd find out after the fact, whoops, they didn't pay us for another block of 50 and then they've got it now; chase after these people to pay them. Yeah, they run a whole bunch of risks. Take our friend Lou. Let's say that he did a job for somebody and sent them an invoice, but the guy didn't pay until the monthly financial report was run. In this case, because Lou did the job during the reporting period, he would recognize that money as being earned on his books. At the same time though, if Lou had a customer that paid in advance, that money would be classified as unearned revenue until he performed the job. This is what we in the biz call, deferred revenue. Now with accounting software like QuickBooks, this whole revenue recognition thing is pretty easy. Let's take a look. Now we're going to enter an invoice and show how that changes to accounts receivable on our balance sheet. What I'm going to do is go to the new and invoice. QuickBooks online assumes if you're using an invoice, it's going to affect accounts receivable automatically as soon as you hit Save. You just pull in a customer name, pull at a product you're selling. Let's just do the drop-down and sell some books here, and let's do five of those. It's totaling my invoice, at 232.50. Let me give my date correct. I want to do today's date. Let's say it's February 4th and we're in a hit "Save". Now before I do that, I wanted to see what my balance is on the balance sheet. I have a balance sheet open in another tab, I have it set to all dates and here is my accounts receivable. QuickBooks is going to know to affect accounts receivable for the 232.50, I'm going to hit "Save", you go over to outside the box on this one on the balance sheet and click "Run Report" and it has updated the balance in accounts receivable. What else has it done? Well, I'll go back to my invoice because there must be a double entry here. I've affected accounts receivable and I've also affected another account. If you look, I have a product here called, "Books for resale", but I don't see what account, what type of income that's affecting. There is a trick in QuickBooks online. If you go to the More button on a save transaction, you can go to the transactional journal. This is basically going to show you the debits and the credits on this particular invoice. I'll open that report out and then we can see what income account was affected with our invoice. Looks to me like product book sales got the credit of 232.50. Every time you hit Save on a transaction in QuickBooks, you can actually open that transaction journal and see the debits and credits in the background. If I go to this revenue account on the profit and loss, and we will update the report first, and there should be a book sales revenue, my invoice should be in here. It's one of these. It's February 4th. There it is. Let me scroll over and you can see my 232.50. QuickBooks says what to do already in the background and this is the transaction journal. It's a really powerful tool if you ever want to take a look at the debits and credits hiding behind a transaction.
