Deferred revenue and accrued revenue are two important concepts in accounting that are often confused with one another. Understanding the similarities and differences between these two types of revenue can be crucial for businesses, as it can help them accurately record and report their financial performance.
The similarity between deferred revenue and accrued revenue is that they both relate to recognising revenue as it is earned, rather than when it is invoiced. The key differences are:
- Deferred revenue is used when an invoice is issued at the beginning of a contractual period, say a quarter or year.
- Accrued revenue is used when an invoice is issued at the end of the contractual period.
For example, if a company sells an annual subscription to a software product covering a subscription for the full year 2023, when it issues an invoice on Jan 1, it will record the deferred revenue. In contrast, if the invoice is issued on 31 Dec, it will record accrued revenue.
One other difference is that deferred revenue is recorded as a liability on the balance sheet, while accrued revenue is recorded as an asset. This is because deferred revenue represents an obligation to deliver goods or services to the customer in the future, while accrued revenue represents the company’s right to receive payment for goods or services that have already been delivered.
How can I improve revenue recognition?
Finance teams typically build large complex spreadsheets to track each invoice and each line within an invoice. These quickly become unwieldy, particularly as contract terms change and credit notes are issued. Even for the best finance teams, errors in large spreadsheets are inevitable and sharing data across teams is a challenge. Year end audits can become more problematic as typically only one person can operate a model.
Automation is key to avoid the errors and time lost.
How does SXP streamline deferred & accrued income?
ScaleXP streamlines deferred revenue and accrued income recognition by reading the details on each invoice and automatically preparing a revenue recognition schedule.
Through a series of complex natural language algorithms, revenue is categorised by month and then by day. The schedule references and links to each invoice in the accounting system, creating an accurate and auditable schedule.
Why is ScaleXP the best solution for revenue recognition?
ScaleXP creates the ability to have a real-time view of revenue, creating a host of benefits:
- Close each month up to 2 days faster. Our customers report saving 2 days per month as complex deferred revenue spreadsheets are no longer required. All calculations are fully compliant with IFRS 15, GAAP and ASC 606.
- Track actuals vs. budget or latest forecast easily. Budgets and forecasts can be tracked in ScaleXP, either through a direct feed from your accounting system or through a spreadsheet upload to the system.
- Stay in control of all revenue metrics. Each month, ScaleXP suggests deferred revenue or accrued income journals. Finance teams always make a decision of the final numbers before they are posted. Revenue correctly recognised feeds metrics such as MRR and ARR, creating a single source of truth across the company.
- Get up and running in just 1 hour. At the end of the hour, your annual invoices and quarterly invoices will be fully spread. Invoices which cross a month will be tagged and allocated using precise daily allocation.
- And best of all… Your CEO and business partners will sincerely appreciate a real-time view of revenue. ScaleXP processes invoices daily ensuring that the business always has an accurate view of revenue. CEOs and sales teams sincerely appreciate seeing this real time view of revenue (presented in our live dashboards) throughout the month.
Learn more about ScaleXP’s revenue recognition automation here.