Revenue Recognition in Zoho Billing

Revenue Recognition is an accounting principle, that ensures revenue is recognized in compliance with the standards set by IFRS 15. It allows you to recognize revenue only after you have successfully provided or deliveredthe service or good respectively to your customer. Once you receive an advance payment from your customer, it will be credited to the Deferred Revenue account.

Once the service has been rendered for a period, the amount will be debited from the Deferred Revenue account (liability) and credited to the Recognized Revenue account (asset).
If a customer cancels their subscription and requests for a refund, the amount will be credited from the Deferred Revenue account and debited to the Accounts Receivables account.

As a result, the asset accounts of the company will remain unaffected.

Note: This feature is currently in Early Access. Reach out to our support team at support@zohobilling.com to enable this feature for your organization.

Scenario: Mr. Aaron Brown is the owner of a SaaS company, Zylker Industries. Whenever a customer subscribes to the yearly plan priced at $1200 ($100 per month), the money received is a liability, since the service is yet to be rendered. Mr. Brown wants to record a part of it as an asset at the end of every month, when the service has been rendered. Mr. Brown can use the Revenue Recognition feature in Zoho Billing to do the same. After configuring Revenue Recognition , $100 will be credited from the Deferred Revenue account and debited to the Recognized Revenue account at the end of every month.

Enable Revenue Recognition

Before you use Revenue Recognition for your organization, you have to enable it in Zoho Billing. To enable:

Navigate to Settings.
Select Revenue Recognition under Preferences.
Click Enable Revenue Recognition.

Revenue recognition will be enabled for your organization. You can now configure revenue recognition preferences according to your business needs.

Configure Revenue Recognition Rules

Different businesses have different criteria for recognizing revenue. For example, some businesses would want to recognize revenue at the start of the period, while some would prefer recognizing revenue at the end of the period. Zoho Billing allows you to create different revenue recognition rules according to your business preferences.

To create a new revenue recognition rule:

Navigate to Settings and select Revenue Recognition under Preferences.
Click + Create New Rule.
Select the preferences according to your needs.
Click Save.

To edit an existing rule, click Edit next to the rule.

Revenue Recognition Fields

Rule Name

Enter a name for your revenue recognition rule. You can also mark the Mark as Default checkbox next to it to make this the default rule.

Description

You can add a small description within 500 characters to describe the rule.

Recognition Frequency

Select how often you want to recognize your revenue:

Monthly - The revenue will be recognized every month. This option is preferred by quarterly, half yealy or annual subscriptions of recurring services which are usually billed every month, such as streaming services, rent payments, or utility bills.
Quarterly - The revenue will be recognized every 3 months. This is useful for subscriptions that are billed every 3 months, such as academic fees or insurance premium.
Yearly - The revenue will be recognized every year. This is helpful in cases of products or services, which are billed annually, such as yearly insurance premiums.
Once - The revenue will be recognized only once. This is useful in cases where a customer subscribes to a service for an entire year and pays the full amount upfront. Revenue is recognized once at the start of the year, as the contract is non-refundable and there are no further obligations for the service provider to fulfil during the year.
Custom - The revenue will be recognized according to the number of months or years that you choose.

Recognition Method

The Recognition Method determines what the recognized revenue will be based on and how it will be calculated.

Daily - The total revenue will be divided by the total number of days to get the revenue per day.The recognized revenue will be calculated accordingly for that period.

Scenario: A subscription worth $100 has been created from 13 February to 12 March.

The total number of days = 27.

Revenue per day = $100/27 = $3.7.

Recognized Revenue for February = $3.7*18 = $57.14

Recognized Revenue for March = $3.7*12 = $42.86
Evenly Distributed - The total revenue will be divided equally by the number of periods, and this amount will be recognized every period.

Scenario: A subscription worth $1200 is created from 1 January 2022 to 31 December 2022.

The revenue frequency is monthly.

Total number of periods = 12.

Recognized revenue per period = $1200/12 = $100.
Evenly Distributed (With Prorated Values) - The total revenue will be divided with prorated values based on the following criteria:
- If the start date of the service period is not equal to the start date of the month and the end date of the service period is not equal to the end date of the month, then the two periods will be considered as one period.
- The revenue will be distributed among all the periods.
- The first and last periods will have prorated values.
Scenario: A subscription worth $1200 has been created for March 15, 2022 to March 14, 2023. The Recognition Frequency is monthly.

Since March 15 is not equal to the start date of the month and March 14 is not equal to the end date of the month, these months will be calculated as one period.

Total number of periods = 12.

Total revenue = $1200.

Revenue per period = $1200/12 = $100.

Revenue for March 2022 = $100 * 17/31 = $54.84.

Revenue for March 2023 = $100 * 15/31 = $45.16.

Revenue for other months = $100.

Recognition Period

The Recognition Period refers to when the money would be recognized for each period:

Period Start - The recognition period will be the beginning of your chosen recognition frequency.

Scenario: Zylker has set the Recognition Period as Period Start.

Invoice Amount : $100

Start Date : January 15

End Date : February 14

Recognition Frequency : Monthly

Recognition Method : Evenly Distributed (with prorated values)

In this scenario, the revenue will be recognized as $50 in January and $50 in February
Period End - The recognition period will be at the end of your chosen recognition frequency.

Scenario: Zylker has set the Recognition Period as Period End.

Invoice Amount : $100

Start Date : January 15

End Date : February 14

Recognition Frequency : Monthly

Recognition Method : Evenly Distributed

In this scenario, the revenue will be recognized as $50 in February and $50 in March.

Associate Revenue Recognition Rules with Products

You can associate Revenue Recognition rules to items and subscription items in order to automatically apply the rules to transactions created with the items or subscription items.

Associate Revenue Recognition Rule for Items

To associate a revenue recognition rule for items:

Navigate to Items under Product Catalog.
Create or edit an item.
Fill in the necessary details.
Click the Recognition Rules dropdown.
Select the desired rule.
Click Save.

Whenever you create an item with this item, the selected rule will be automatically applied to the transaction.

Associate Revenue Recognition Rule for Subscription Items

Zoho Billing allows you to associate revenue recognition rules for plans and addons under Subscription Items.

To associate a revenue recognition rule for a plan or addon:

Navigate to Subscription Items under Product Catalog.
Create or edit a plan or addon.
Fill in the necessary details.
Click the Recognition Rules dropdown.
Select the desired rule.
Click Save.

Whenever you create a subscription with this plan or addon, the selected rule will be automatically applied to the transaction.

Associate Revenue Recognition Rules to Transactions

You can associate revenue recognition rules to invoices and subscriptions in Zoho Billing.

Associate Revenue Recognition Rules to Invoices

You can have different revenue recognition rules for each line item for each invoice.

To associate revenue recognition rules to invoices:

Navigate to the Invoices module under Sales.
Create or edit an invoice.
Click the 3 dots icon next to the item under the Items Table.
Select Show Additional Information.
Click Revenue Recognition below the item.
- Select the desired rule from the Recognition Rules dropdown.
- Select the Start Date and End Date.
- Select the Allocation Method.
- Click Save.
Click Save.

The revenue recognition rules will be updated for each of the line items in the invoice.

Associate Revenue Recognition Rules to Subscriptions

You can have different rules for the plan and each addon for each subscription.

To associate revenue recognition rules to subscriptions:

Navigate to the Subscriptions module under Sales.
Create or edit a subscription.
Add the desired plan and addons.
Click the 3 dots icon next to the plan or addon.
Click Show Additional Information.
- Select the desired rule from the Recognition Rules dropdown.
- Select the Start Date and End Date.
- Select the Allocation Method.
- Click Save.
Click Save.

The revenue recognition rules will be updated for the plan and each of the addons in the subscription.

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