We listed some processes ancillary to the billing process and talked about allocations.
Let us discuss “Revenue Recognition” today. As the term suggests, it is a process of recognizing the revenue. Accountants / accounting students would argue that if we have raised a bill or invoice, we have already factored the revenue. Well, for small and medium businesses that’s a yes.
But what if your client is an engineering major, and one unit of the final product takes a few years to complete, and you have raised a claim for stage based billing, rather advance to be paid at different stages and generate either a bill or just a proforma invoice?
Revenue recognition is a decision process, where the board of your client decides how much of the billed amounts need to be recognized in the specified period as the company’s revenue. Large companies usually close their books (ERP systems) on a monthly basis. Based on the sales / revenue guidance released by the board of directors, they need to report the “recognized revenue” on a month on month basis to the shareholders / investors of the company.
For this, based on the industry type, the board of directors will create and publish guidelines, structuring the revenue and the norms by which this can be recognized. Ideally this is done to balance the year on year profitability and growth numbers.
Now, this is a decision making activity, so your client will not delegate this to a back office or an outsourcing unit, however, these guidelines and decisions will be converted to instructions and specific directions so that you can effect entries in the ERP / accounting system. Believe me this is a critical activity and is quite often considered as a high end back office process.
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