The revenue recognition rules determine how and when the revenue will be recognized according to the service periods of the invoice lines, made from the order charges and their individual revenue recognition rules.
You can find the revenue recognition rules under Settings, Financial, and Revenue Recognition Rules.
There are 3 revenue recognition methods:
- Full recognition upon invoicing: The revenue will all be recognized at the time of the invoice
- Monthly recognition over time: The revenue will be recognized as distributed over the service period per month
- Mixed upfront and over time: Mix of the two previous options, distributed with different percentage shares
- FrontLoad: The revenue is calculated per month and the first partial month of a subscription term starting within a month (not the 1st of a month) will get full revenue recognition
- BackLoad: Opposite of FrontLoad, the revenue is calculated per month and the last partial month of a subscription term starting within a month will get full recognition
- Prorated: The revenue will be calculated and recognized per month if it's a full month, a partial month will have its actual days within the subscription term revenue recognized. (The most popular and common configuration)
- Days: The revenue will be recognized per day if the billing period has broken months (i.e. doesn't start 1st of a month and end last of a month, but starts and/or ends in the middle of a month), for example, the revenue recognized will be different amounts for full months of January (31 days), February (28 days), and April (30 days)
Monthly recognition over time example:
We can choose between the five distribution options.
- 1000 EUR Per month
- Effective Start Date: 2019-01-15
- Effective End Date: 2020-03-14
Here, January and March are partial months and the revenue recognition rules will be important. February is a full month and will have revenue recognized as usual: 1 000 EUR.
- Prorated: The revenue will be calculated and recognized per day for January and March, and each will get approximately 500 EUR, while February will get a full 1 000 EUR.
- FrontLoad: The revenue is calculated per month and the first partial month of the subscription term will get full revenue recognition. In this case, January is the first partial month and will get 1000 EUR, while March will get 0 EUR recognized.
- BackLoad: Opposite of FrontLoad, the revenue is calculated per month and the last partial month of the subscription term will get full recognition. In this case, January will get 0 EUR and March will get 1 000 EUR recognized.
Mixed upfront and overtime configuration:
When choosing this method, you will get some additional options for the revenue distribution:
- Upfront Percentage: The percentage amount of the revenue to be recognized upfront, the rest is recognized according to the distribution rule you choose
- Upfront only on first invoice: This mixed rule will only apply to the first invoice, then the chosen distribution rule will apply
- Base upfront on list price: In this case, the revenue recognized upfront will be based on the list price (from the product information) and not the actual price on the order charge
Here is an example of a setup:
The revenue recognition rules are applied to charges, and you can change the rule on every charge: