Revenue and Expense Recognition – making it all line up

Here at Codence we have designed many workflows to help our customers navigate the timing of revenue and expenses to provide more accurate financial statements and better profitability forecasts, as well as to be GAAP compliant. In this article we look at one interesting example.

Revenue and expense recognition can sometimes be tricky. Many companies don’t have a great way of tagging their transactions when they hit deferred accounts on their balance sheet. It can be difficult to “find” the revenue and expenses that need to be recognized in a period. Genesis can make it easy to run reports that show you the revenue and expenses to recognize in a given period. With these reports and our importable Excel journal entries, closing can be a breeze.

Case Study: the Shift from Cash to Accrual Accounting

Our client, let’s call them Events Plus, puts on hundreds of events a year. They collect revenue well in advance of the event and often have expenses trickle in months after the event. For years, they ran their business on a cash basis and tried to use segregated bank accounts to manage money earned vs money deferred. While this “worked” when they were under $5 million in annual revenues, as they grew they needed a better solution.

They came to us not only wanting to integrate their homegrown FileMaker solution with Genesis Accounting, but wanting to switch from cash to accrual based accounting.

Integrating Operations Data with Genesis 

First, we had to get their event codes into Genesis. These event codes had embedded in them the date of the event and they were part of every transaction. Their front end had the information in every sale, and when they purchased materials to support the event, they also used that code. Genesis offers customizable fields that post into the accounting system. We used one of these customizable fields to capture the event code in both AR and AP transactions. They also appear in all General Ledger reporting. Because this is FileMaker, the field we used was easily searchable and sortable, and could be summarized in reports.

Quarter-Specific Balance Sheet Accounts

With a way to track each transaction, now we needed to tell Genesis where the information needed to be booked. We had the additional goal of giving our client more insight into their operations and future profitability. This led us to create quarter-specific deferred revenue and prepaid expense accounts.

We created rolling quarter asset and liability accounts to post transaction information to based on the date of the event. The accounting staff entered transactions as before, tagging them with the event code. When they posted the transactions, which recorded it in Genesis, we used the event code to dynamically (programmatically) identify which balance sheet account the transaction would be booked to. If an event code put the event in the first quarter of the year, we booked it to a balance sheet account named as:

1Q22 Events Deferred Revenue or 1Q22 Event Prepaid Expense

We created twelve rolling accounts in Assets and twelve rolling accounts in Liabilities in order to always make sure we had an account available to receive the transactions. We automated the renaming of the accounts so that once all of 1Q22 transactions had been recorded that account would become 1Q25.

Enhanced Visibility and Simplified Month-End Closing

These balance sheet accounts allow our client to see into the future. They can easily see how much money has been collected for a specific quarter, and how much in expenses they have paid in a specific quarter.

At month end closing we can easily pull the transactions out of the balance sheet that need to be recorded. Because the custom field is searchable and our General Ledger Reporting tool is so awesome (please see blog: The Life Changing Magic of the Genesis General Ledger) we can pull information for our closing journal in seconds.

We simply make a find request to pull all transactions coded to the month. This information can then be exported into Excel. It can be further reviewed and modified in Excel if desired, though usually no changes are needed. It can then be imported into Genesis as a general journal entry, recognizing revenue and expenses for the month.

We know all of our entries are correct when we close the last month in the quarter and the balance for both the asset and liability accounts go to zero. It is a handy way to find the occasional mistake if the accounts aren’t zero.

The Power of a Customizable Accounting Program

While most companies don’t have to work this hard to adjust for the timing of their revenue and expenses on their income statements, this exemplifies how powerful Genesis customizable fields can be. Using these fields we can automate the recording of transactions that will ultimately make the month end closing process a piece of cake.

These accounting changes were all programmed into the integration between the client’s front end system, where all the transactions are initially recorded, and Genesis. Their staff did not have to adjust their workflow at all. Using that essential field we were able to record transactions into the correct accounts in Genesis. While their controller did have to add revenue and expense recognition journal entries to their close procedures, we made that process fast and easy.