Best Practices in Revenue Recognition
Revenue recognition is an accounting principle and a recommended best practice. It is under generally accepted accounting principles (GAAP). Revenue recognition means recognizing specific conditions, under which income becomes recognized as revenue. Income is often recognized as revenue when a business organization delivers or performs its business and receives a payment. Revenue is only recognized after the period of return expires.
The best practices required for revenue recognition include the following:
- Forecasting System: There must be a forecasting system which automatically distinguishes between services, products and support for the contract. It should also be able to handle recurring revenues, subscriptions and unexpected deals.
- Company Policies: Does the accounting system implement best practices and enforce company policies regarding revenue recognition. It must also implement best practices in booking rules and quoting deals or contracts.
- Effective Recoding System: There must be best practices in keeping records. For example differential reporting. Additionally, if records get deleted, there must be standard protocols to handle it.
- Policies on Review of Contract: To ensure best practices in revenue recognition there is need for clear guidelines on how to change a contract after it has been booked.
- External Auditor: The entire setup of accounting in the organization must be able to stand up to external auditors. There must be implementation of best practices to ensure the system is up to the standard.
- Termination of Access: Employees leaving the organization should not get access to the privacy of the company upon leaving. There must be proper best practices to ensure this.
- Limited Access to Data: Depending on the organization chart, there must be limited access to data for some people. There must be implementation of best practices to limit access to data.
- Risk Management: There has to be a proper system to ensure risk management to maximize revenue recognition. This requires best practices in processes involved in the accounting system of the organization.
Furthermore, there is need for a proper guide on revenue recognition and reconstruction. This includes:
- Recognizing the value of financial statements.
- Compliance with Accounting principles and reporting standards.
- Understand in Financial statements and their users.
- Ensuring implementation of audit, review and compilation processes.
- Marking the lines of credit, bank loans and long term debts.
- Using Financial Instruments.
In order to maintain the best practices in revenue recognition, there has to be improvement in the forecasting system. At the same time, compliance is also important to ensure the best practices are maintained at all times.
Further reading: Corporate Governance | Audit | Performance Improvement