What does revenue reconciliation mean?
Businesses check the sales records from two or more different systems to see if they match through revenue reconciliation. When accounting teams match up income, they can find mistakes like typos or lousy data entry that would otherwise cause issues.
Most businesses get their revenue records from their financial system, point-of-sale system, and other outside sources, like credit card statements. These sites must all agree with each other. Otherwise, the group won’t be able to give an exact picture of its finances, list its income on financial statements, or send the IRS tax returns.
For businesses’ income reconciliation to work, they need an exemplary process run by software. They need a way to keep track of their income, for different systems to check and balance each other, and for an automation platform that takes into account things like currency exchange rates, payment terms, and the type of service provided (for example, a contract vs. a rental).
Similar words:
- cash-to-revenue reconciliation
- delayed revenue reconciliation
Why Revenue Reconciliation Is Important
Income balancing is essential for businesses because it shows them the truth about their money situation, progress, and plans. It also helps them find mistakes and possible issues early on. It also keeps them out of legal and financial trouble if they are audited.
Accuracy of Financial Data
One of the best things about revenue reconciliation is that it can help make financial statistics more accurate. There’s a lot of room for error, for 59% of companies still use spreadsheets as their primary tool for budgeting and planning their finances.
Some manual help will always be needed, even when billing, ERP, and accounting tools are all linked together. Not only that, but machines also make mistakes, though not as often.
No matter what, it’s always a good idea to check the numbers twice to make sure they match. A mistake that seems small, like an extra zero, could easily mess up the whole financial account and make it hard to make decisions. Imagine if an income of $1,000,000 was reported as $10,000,000 or vice versa.
Find out if there is fraud.
By pointing out differences between two or more reports, revenue reconciliation can help businesses find scams. For example, if a customer sent a bad check for a service, the business could deposit it on the phone and see the amount go up right away.
From an accounting point of view, this would make the system record new income. When the check bounces, some accounts might not get the correct information. When the revenue accounts are matched, there is a clear difference between the number on the income statement ($X for services provided) and the number in the bank account ($0).
Setting up alarms that go off when there are differences between accounts is a good idea, and they should be matched up at least once a month. This way, businesses can be sure that their information about their income is correct and free of scams.
Correct Reporting
- There are several reasons why it’s essential to have accurate top-line financials.
- They give management accurate financial information to make intelligent strategic choices.
- These numbers help investors and owners determine how well a business is doing. Being correct builds trust and faith.
- Businesses must correctly report their income to the IRS because it’s the law.
- Businesses use them to see where they are spending too much and make the necessary changes.
- They make it more accurate to guess how much money will come in the future and make bills.
- They draw attention to possible dangers and money-related threats, which lets people take charge of managing risks.
- They make comparing industry standards and the market more accessible, which helps with competitive analysis.
- Companies have a better chance of getting loans and funding if they give buyers and lenders a clear picture of their financial health.
Revenue reconciliation makes sure that all the processes are in sync. Not only is this the right thing to do, but it also ensures that the balance sheet and cash flow statement they give to the IRS and other essential people are correct.
Take care of cash flow issues.
Businesses can look into anything that comes up during revenue reconciliation before it turns into a full-blown problem. Minor problems, like forgetting to send a payment, can add up and cost a lot of money if they keep happening.
Compliance with GAAP
Generally Accepted Accounting Principles (GAAP) say businesses must give correct information about their income and costs. When reconciling your accounts, ensure every journal entry makes sense with your general financial records. This keeps your business from having to pay the huge fines that come with not following GAAP.
Different Types of Revenue Recognition and Reconciliation
In accrual-basis accounting, companies record revenue as it is made, even if they haven’t received cash yet. This is called “recognition of revenue.” ASC 606 (or IFRS 15 for foreign companies) says that businesses have to record revenue when any of the following conditions are met:
The deal is accurate and valid in the business world. – The customer is legally required to pay. The goods or services have been delivered. – The company can be pretty sure of getting paid.
Income reconciliation is what a business does to ensure that the right amount of income is recognized. The accounting staff would look at financial records, billing, and payment history, and records of services provided to make sure they recorded revenue at the correct time.
Problems with reconciling revenue for SaaS businesses
A SaaS company’s primary source of income is subscriptions, which are more challenging to manage than one-time sales. For each area they serve, they need to know much about the different billing cycles, customer payment terms, exchange rates, and tax implications.
It’s hard for businesses to keep service sales separate from product sales when customers buy multiple items at once or get both memberships and one-time items or services. They also have to keep track of deals that don’t bring in money, like discounts and refunds.
Some common mistakes are:
Not reading the small print of the deal
- Wrong grouping based on the price level they chose
- Not paying attention to revenue sources based on usage
- Not keeping track of discounts, refunds, and downgrades properly
- Forgetting about the money made from partner channels
- Adding up sales twice
- Ignoring deals entirely by accident
- Bookkeepers and inspectors use different exchange rates for money
Not matching up deferred income at the order level; not doing a formal monthly matching-up process;
For correct revenue reconciliation, SaaS companies need a robust system that collects revenue data from all sources, puts it in one place, and regularly compares it to the general ledger. They should also consider automating their billing and invoicing or working with a professional who is experienced in recognizing income.
Instructions on How to Do Revenue Reconciliation
There are two ways businesses can ensure their revenue is correct: they can audit their methods for recognizing revenue and check their customer accounts.
Revenue Recognition 1. Figure out where the money is coming from. First, list all the places where the company makes money. This could include selling goods, providing services, or doing anything else that brings in money.
- Match up your income and spending. According to the rules for recognizing revenue, ensure that the revenue recorded fits the amount spent to make that revenue in the same accounting period.
- Write down all revenue deals. Keep thorough records of all activities that bring in money. Invoices, sales records, and contracts are all examples of this.
- Figure out the income. Add up all the money from different sources during the accounting period. Include only the income that meets the conditions for recognition.
- Match up the income accounts. The revenue that was calculated should be compared to the revenue that was shown in the financial records. Look for any differences.
- Look into the differences. This could mean looking at transaction records and contracts or talking to people in the right areas.
- Make any changes that are needed. Once you know why there are differences, you can make the appropriate changes to the financial statements.
- Look over and agree. A top accountant or financial manager should review and approve the updated financial statements.
- Report your income. Lastly, include the income matched up in the financial records.
Reconciliation of Accounts
- Find out things. First, get together all of your essential cash records. This includes bank records, bills, receipts, and the general ledger for your business.
- Choose which accounts need to be matched up. Pick out the accounts that need to be matched up. Usually, this includes all of the accounts for assets, debts, and property.
- Look over the primary record. Look at the general record for the account you want to match up. All activities that affect that account should be written down in the ledger.
- Look at the ledger and compare it to outside accounts. A few different kinds of statements could be used for this.
- Look for differences. Take note of any differences between the two sets of records. This could include different amounts, transactions that appear in one record but not the other, or transactions logged incorrectly.
- Look into the problems. Depending on the comparison, you might need more information from other offices or customers.
- Make changes to the primary record. After your research, make the required changes to the general ledger. This could mean fixing mistakes or adding deals that are missing.
- Make sure the new balance is correct. The account balance on the external statement should now match the account balance in the general ledger after the changes were made.
- Write down the reunion. Keep a record of the settlement process. This should have the original balance, the modified balance, a list of all the differences and how they were fixed, and finally, the final reconciled balance.
- Look over and agree. Get a responsible person, like a top accountant or financial manager, to review the reconciliation and give their OK.
How a billing platform makes sure that revenue reconciliation goes smoothly
Integrated billing software keeps a complete record of all transactions with a time stamp. It also instantly updates financial records with customer payments, so you don’t have to enter the information manually. It also has thorough analytics and reporting tools that make reviewing transactions that bring in money easy.
Billing platforms also have alerts informing teams of strange behavior or possible mistakes. This helps businesses keep track of their income and expenses throughout the month, ensuring that the revenue accounting is done on time and correctly. Plus, the automated method lowers (and sometimes gets rid of) the chance of mistakes people make.
