Authored by Frank I Quintieri, CPA*
Revenue recognition is crucial for small business financial reporting to ensure compliance and provide accurate information to stakeholders. This whitepaper summarizes key points from ASC 606 for small businesses. It also includes a brief overview of Capri Accounting’s Revenue Recognition Study, which assesses your company's compliance with the standard while recognizing revenue in the most efficient way for your business.
Introduction
Revenue recognition is a fundamental accounting principle that determines when and how revenue is recognized in a company's financial statements. For small business owners, understanding revenue recognition is crucial for several reasons:
Compliance with Accounting Standards Understanding and adhering to ASC 606 guidelines ensures that financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP), which is essential for maintaining credibility with investors, lenders, and other stakeholders.
Accurate Financial Reporting
Proper revenue recognition leads to accurate financial statements, which are vital for making informed business decisions and assessing the company's financial health.
Avoid Penalties and Other Legal Issues
Non-compliance with ASC 606 can result in penalties, legal issues, and damage to the company's reputation.
The Five-Step Model
ASC 606 introduces a five-step model for recognizing revenue from contracts with customers. Small business owners need to understand these steps to ensure proper revenue recognition:
Step 1: Identify the Contract with a Customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations. Small business owners must identify contracts with customers and ensure that they meet the criteria for revenue recognition under ASC 606.
Step 2: Identify the Performance Obligations within the Contract
Performance obligations are promises to transfer goods or services to the customer. Small business owners must identify all distinct performance obligations in a contract and determine exactly how they can be satisfied.
Step 3: Determine the Transaction Price
The transaction price is the amount of consideration that the company expects to receive in exchange for transferring goods or services to the customer. Small business owners must consider factors such as variable consideration, significant financing components, and non-cash consideration when determining the transaction price.
Step 4: Allocate the Transaction Price to the Performance Obligations
Once the transaction price is determined, it must be allocated to the performance obligations in the contract based on their relative standalone selling prices. Small business owners need to understand how to allocate the transaction price accurately to ensure proper revenue recognition.
Step 5: Recognize Revenue When (or as) the Performance Obligations Are Satisfied
Revenue is recognized when (or as) the performance obligations are satisfied by transferring control of the goods or services to the customer. Small business owners must determine the appropriate method for recognizing revenue, whether it be overtime or at a point in time.
Over time: This method recognizes revenue gradually as the performance obligations are satisfied over a period. It’s typically used for long-term contracts where services or goods are delivered continuously or in stages. Examples include: construction projects, subscription services, and maintenance contracts.
Point in Time: This method recognizes revenue at a specific moment when control of goods or services is transferred to the customer. It’s used when the delivery is completed in one go. Examples include: retail sales, product shipment, installed equipment.
Challenges and Considerations for Small Business Owners
Implementing ASC 606 can be challenging for small business owners due to limited resources and expertise. Here are some considerations to keep in mind:
Training and Education
Small business owners and their accounting staff need to be trained on the principles and requirements of ASC 606. This may involve attending workshops, seminars, or online courses to gain a thorough understanding of the standard. Another alternative is to hire third party accounting consultants to do the day-to-day accounting and reporting duties of the small business. Capri Accounting offers full-charge bookkeeping performed to the highest of standards.
System and Process Changes
Implementing ASC 606 may require changes to existing accounting systems and processes. Small business owners should assess their current systems and make necessary adjustments to ensure compliance with the new standard.
Professional Assistance
Seeking assistance from accounting professionals or consultants with expertise in ASC 606 can help small business owners navigate the complexities of the standard and ensure accurate revenue recognition.
Continuous Monitoring and Review
Revenue recognition is an ongoing process that requires continuous monitoring and review. Small business owners should regularly review their contracts, performance obligations, and transaction prices to ensure compliance with ASC 606.
Summary
Understanding revenue recognition as per ASC 606 is essential for small business owners to ensure compliance with accounting standards, provide accurate financial information, and avoid potential penalties and legal issues. By grasping the key principles of ASC 606 and addressing the associated challenges, small business owners can enhance their financial reporting and make informed business decisions. Investing in training, system changes, professional assistance, and continuous monitoring will help small business owners successfully implement ASC 606 and achieve long-term financial success.
Revenue Recognition Study
Capri Accounting’s Revenue Recognition Study ensures small businesses comply with ASC 606 standards. We evaluate compliance and customer contract structures, identifying optimization opportunities. Our detailed review of financial records and contracts, in collaboration with your team, pinpoints non-compliance areas and provides actionable recommendations. This proactive approach ensures accurate financial reporting and supports business growth. We understand small business challenges and aim to provide tools and insights for navigating revenue recognition complexities.
The average length of study is 3-5 business days.
Cost of study is $1,199 ($500 due up front as retainer. Balance due at the end of engagement prior to report issuance).
*for References used download pdf version.
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