Revenue recognition can be done differently by different accounting firms because of various reasons. But ultimately, it all comes down to a trade-off between accuracy and time spent on revenue recognition.
Synder offers a solution designed specifically for subscription based businesses using Stripe and accounting firms serving such businesses to provide them with the most accurate revenue recognition based on the number of days in the billing periods. However, there are more generalized revenue recognition methods that Synder supports as well to make it easier to transfer your existing RevRec flow to Synder for complete automation.
Overview:
- Daily ratable revenue recognition method
- Monthly ratable (excluding last period) revenue recognition method
- Monthly ratable first/last prorated revenue recognition method
- Examples of the revenue recognition methods
- How to change the recognition method in Synder
Daily ratable revenue recognition method
This method is the most accurate for subscription-based businesses if your subscription is time-based. The idea is that the app calculates the number of days in the full billing period and the number of days that are actively covered by the subscription within the given month.
The app divides the amount of the contract (subscription invoice) by the number of days in the full billing period to multiply it then by the number of days that are actively covered by the subscription in the current month.
Note: The first day is always included in the billing period, and the last one is excluded.
Monthly ratable (excluding last period) revenue recognition method
This method simplifies the concept of days and divides the contract (subscription) amount by the number of months, excluding the last month.
So the first month is treated as if it was fully covered by the subscription, which started on the 1st month, while the last month is not taken into account.
Monthly ratable first/last prorated revenue recognition method
This method is based on the previous one, making it more detailed. In this method, the subscription amount is divided by the number of months, however, the first and last months are prorated based on the number of days covered by the subscription.
Note: The first day is always included in the billing period, and the last one is excluded.
Examples of the revenue recognition methods
Below are some examples showing how we should recognize the following yearly subscription invoice.
Example:
– Billing period start date 20 August 2022
– Billing period end date 19 August 2023
– Invoice for $1200
- Daily ratable
The billing period includes the full year – 365 days (excluding even years). So the total amount of the invoice should be divided by the number of days in the billing period:
$1200/365=$3.29
In this case, $3.29 is the amount to be recognized each day.
Then the number of days covered by the subscription within a given month should be calculated and then multiplied by the amount of the recognizable revenue for this day.
For example, for August 2022, when the subscription covered 12 days:
$1200/365*12=$39.45
See the results of the remaining calculations below:
| Period | Days in period | Income |
| August | 12 | $39.45 |
| September | 30 | $98.63 |
| October | 31 | $101.92 |
| November | 30 | $98.63 |
| December | 31 | $101.92 |
| January | 31 | $101.92 |
| February | 28 | $92.05 |
| March | 31 | $101.92 |
| April | 30 | $98.63 |
| May | 31 | $101.92 |
| June | 30 | $98.63 |
| July | 31 | $101.92 |
| August | 19 | $62.46 |
| Total | $1200.00 |
Note: The same approach is applied to monthly subscriptions, which are recognized based on the days covered in a given month.
- Monthly ratable (excluding last period)
According to this method, the amount of the subscription ($1200) is divided by the number of months included in the billing period excluding the last month (13-1=12). So as a result $100 is recognized each month.
| Period | Income |
| August | $100.00 |
| September | $100.00 |
| October | $100.00 |
| November | $100.00 |
| December | $100.00 |
| January | $100.00 |
| February | $100.00 |
| March | $100.00 |
| April | $100.00 |
| May | $100.00 |
| June | $100.00 |
| July | $100.00 |
| August | $0.00 |
| Total | $1200.00 |
Note: As you may conclude, this method will not be used to recognize revenue for monthly subscriptions, as the full monthly amount will be recognized in the month of the invoice.
- Monthly ratable first/last prorated
According to this method, the amount of the subscription ($1200) is divided by the number of months included in the billing period excluding the last month (13-1=12) as well. However, instead of excluding the last month, the system will prorate the first and last month based on the number of days covered by the subscription:
$1200/12=$100
In this example, $100 is the amount to be recognized month over month.
Accordingly, $100 is the amount spread across August 2022 and August 2023.
There are 31 days in August, 12 of which are covered by the subscription in August 2022, and 19 days – in August 2023:
August 2022: $100/31*12=$38.71
August 2023: $100/31*19=$61.29
| Period | Income |
| August | $38.71 |
| September | $100.00 |
| October | $100.00 |
| November | $100.00 |
| December | $100.00 |
| January | $100.00 |
| February | $100.00 |
| March | $100.00 |
| April | $100.00 |
| May | $100.00 |
| June | $100.00 |
| July | $61.29 |
| August | $0.00 |
| Total | $1200.00 |
Note: The same approach is applied to monthly subscriptions, which are recognized based on the days covered in a given month.
The methods described in this guide are basic ones. However, you are not limited to those, as the system is highly customizable. Please feel free to apply for support to customize any of these methods to your needs!
How to change the recognition method in Synder
The method is set as a default option for a specific organization. If you want to change the revenue recognition method, you can roll back all the data from your books and create a new organization, selecting a new method there. In order to do so, please follow simple steps:
- Click the “Organization/Client” dropdown in the top left corner of the Synder application.
- Select “Create organization” (or “Add client”).
- Connect all the systems to the new organization and apply for support to enable revenue recognition.
Alternatively, if it is important for you to keep your current organization, you can apply for support, so that we could assist you from our side by refreshing the data with the new method. However, keep in mind that the already synced months will not be available for refresh, so we highly recommend cleaning your books using the rollback feature first so that we could refresh all months that have not yet got to your books.
Reach out to the Synder team via online support chat, phone, or email with any questions you have – we’re always happy to help you!