Note: this was originally published at https://alexoppenheimer.substack.com/
Happy Accounting Monday!
This post is pretty accounting-ish, but hopefully helpful and not eye-glaze-inducing. I have found that it's not clear what revenue actually is and how all the other affiliated terms fit into a specific business and its operations and accounting. As many of you know, I often work with companies selling digital subscriptions, so while there might be other sector-specific definitions, I am generally writing in the context of SaaS.
The revenue recognition principle, a feature of accrual accounting, requires that revenues are recognized on the income statement in the period when realized and earned—not necessarily when cash is received. Realizable means that goods or services have been received by the customer, but payment for the good or service is expected later. Earned revenue accounts for goods or services that have been provided or performed, respectively. The revenue-generating activity must be fully or essentially complete for it to be included in revenue during the respective accounting period. Also, there must be a reasonable level of certainty that earned revenue payment will be received. Lastly, according to the matching principle, the revenue and its associated costs must be reported in the same accounting period.
Thank you to investopedia for some of the detailed lingo.
These revenue-related metrics all have varying levels of importance for each type of business, and understanding what they represent will help any operator better report on and direct their business long term.
Feel free to reach out directly with questions about what they (and any others) mean in a specific business. Happy to try to help figure it out. The two images below represent how this stuff makes me feel.