Entrepreneurship & Small Business

How to do you determine your 'sales / revenue' for each month?

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  • Aug 28th, 2016 5:07 pm
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Deal Addict
Oct 6, 2014
1315 posts
116 upvotes
Toronto, ON

How to do you determine your 'sales / revenue' for each month?

How to do you determine your 'sales / revenue' for each month?

For example, if I received a project that's worth $10,000 in Aug, and will be splitted 3 installments.

$3000 (deposit) in Aug
$3000 in Sep
$4000 in Oct

Will I put $3000 in sales for Aug (since thats the amount I actually received), or $10000 for Aug (since that's really the amount I closed).

If I go with the latter, then what happen if the client doesn't pay the bill 3 months later? Would I have to deduct it off my Oct balance then?

Whats the proper way of doing this? Thanks.
4 replies
Deal Addict
Jun 12, 2015
2551 posts
1071 upvotes
Ontario
I assume you are gaap and not ifrs. However slightly similar.

To record revenue you need;
Performance - not met since you have not completed the project yet. I assume this is an all or nothing contract.

Collection is reasonably assured - not met since you have questions about whether they will pay

Revenue is measureable - yes you have your 10k revenue.

Therefore since you did not meet those criteria, you cannot record any revenue at all.

In terms of the 3k deposit, it will be deferred revenue and cash. You will reverse the deferred revenue into actual revenue when your complete the contract and meet all 3 criteria above.

If you are in ifrs, you need extra 2 criteria of expense is measureable and probable future benefit to you, which you meet during this time.
Sr. Member
Feb 15, 2010
702 posts
700 upvotes
Surrey
Dynasty is correct on the amount of revenue recognized in August, which is $Nil. During the course of the contract you should recognize using the percentage of completion method. This would involve you recognizing your revenue based on how much work of the project is completed. Therefore if you are 40% completed the project you would recognize $4,000 (($10K * 40%) in revenue, REGARDLESS of the amount cash you have received/yet to receive (unless you believe you are unlikely to receive payment). This recognition of revenue will likely result in setting up a receivable balance or reducing the amount of deferred revenue setup as mentioned by Dynasty. Percent of completion should be based on some reasonable method, such as actual costs/hours incurred to budgeted costs/hours to completion. If the customer does not end up paying for services rendered and recognized into revenue you will reduce your accounts receivable balance by expensing the balance to bad debts.

However, if you don't need to be concerned with financial reporting and are concerned for tax purposes, assuming your corporate year end is not within this August - October period, you can just recognize it all to revenue on a cash basis as it will be the appropriate amount of revenue by that time frame.
Deal Addict
Jun 12, 2015
2551 posts
1071 upvotes
Ontario
SirLookout4Deals wrote:Dynasty is correct on the amount of revenue recognized in August, which is $Nil. During the course of the contract you should recognize using the percentage of completion method. This would involve you recognizing your revenue based on how much work of the project is completed. Therefore if you are 40% completed the project you would recognize $4,000 (($10K * 40%) in revenue, REGARDLESS of the amount cash you have received/yet to receive (unless you believe you are unlikely to receive payment). This recognition of revenue will likely result in setting up a receivable balance or reducing the amount of deferred revenue setup as mentioned by Dynasty. Percent of completion should be based on some reasonable method, such as actual costs/hours incurred to budgeted costs/hours to completion. If the customer does not end up paying for services rendered and recognized into revenue you will reduce your accounts receivable balance by expensing the balance to bad debts.

However, if you don't need to be concerned with financial reporting and are concerned for tax purposes, assuming your corporate year end is not within this August - October period, you can just recognize it all to revenue on a cash basis as it will be the appropriate amount of revenue by that time frame.
Would % of completion be allowed if the contact is not over 1yr long?
Sr. Member
Feb 15, 2010
702 posts
700 upvotes
Surrey
Dynasty12345 wrote:
SirLookout4Deals wrote:Dynasty is correct on the amount of revenue recognized in August, which is $Nil. During the course of the contract you should recognize using the percentage of completion method. This would involve you recognizing your revenue based on how much work of the project is completed. Therefore if you are 40% completed the project you would recognize $4,000 (($10K * 40%) in revenue, REGARDLESS of the amount cash you have received/yet to receive (unless you believe you are unlikely to receive payment). This recognition of revenue will likely result in setting up a receivable balance or reducing the amount of deferred revenue setup as mentioned by Dynasty. Percent of completion should be based on some reasonable method, such as actual costs/hours incurred to budgeted costs/hours to completion. If the customer does not end up paying for services rendered and recognized into revenue you will reduce your accounts receivable balance by expensing the balance to bad debts.

However, if you don't need to be concerned with financial reporting and are concerned for tax purposes, assuming your corporate year end is not within this August - October period, you can just recognize it all to revenue on a cash basis as it will be the appropriate amount of revenue by that time frame.
Would % of completion be allowed if the contact is not over 1yr long?
Yes, the contract does not need to be greater than a year for the percent of completion to take effect. Per ASPE 3400.06:
In the case of rendering of services and long-term contracts, performance shall be determined using either the percentage of completion method or the completed contract method, whichever relates the revenue to the work accomplished. Such performance shall be regarded as having been achieved when reasonable assurance exists regarding the measurement of the consideration that will be derived from rendering the service or performing the long-term contract.

Therefore, at any point in time during the term of the contract you can use the three criteria you listed above to determine whether or not revenue should be recognized. For example, in the OP's situation, it would likely be inappropriate to say the day before the contract is completed and paid that he has $0 in revenue and that the very next day he has $10K in revenue. As I mentioned previously, you may use the completed contract method if all your contracts complete within your fiscal year as it will have no impact to your financial statements. However, as the OP identified he wants to know how much to record monthly I presume he is preparing monthly financial statements so this information is relevant for him.

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