![]() If Nick does the work and gets paid later, there are actually two transactions:Īccounts Receivable (asset) + $1,500 = Revenue (equity) + $1,500Ĭash (asset) + $1,500 and Accounts Receivable (asset) − $1,500 = (no effect on liabilities or equity) Nick does the work and gets paid at the same time:Ĭash (asset) + $1,500 = Revenue (equity) + $1,500 In terms of the accounting equation, revenue recognition looks like this: In fact, if Nick is paid in advance and puts the money in the bank, that’s not revenue. The cash coming in is a separate transaction. That’s the simplest version of revenue recognition under accrual basis accounting. Assuming again that Nick is using QuickBooks, at the same time Nick pushes the button that sends the invoice to the customer, the system records the revenue. So, for practical purposes, revenue is recognized and realized at the same time. The fact that the customer paid means the work was most likely acceptable. Legally, Nick earned the revenue when the work was deemed acceptable to the client. Let’s assume as soon as Nick did the work and entered his time, the system calculated the billing to the customer and emailed the invoice (bill) to the customer who then paid it immediately, before Nick even got back to his home office. The revenue was both realized and recognized at the same time (Nick had you set up an accounting system by now for him and recorded the revenue when he earned it.)įor simple transactions like this, the revenue is recorded as it is billed when using QuickBooks and most other accounting systems. On October 15, Nick Frank received $1,500 for services performed, which means that he did the work (cleaning) and the client paid cash right then.
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