When using a system like Iteras, you gain access to accounting your revenue as legally required – namely, on an accrued basis. It is virtually impossible to do this correctly without a system that keeps track of what needs to be accrued. In this article, we explain how to correctly account using accruals.
Accrual means that revenue is recorded at the time it relates to. “Relates to” in this context means the delivery of the product. If you have a digital medium without issues – e.g., a website continuously updated with new content and no formal releases – then technically, a portion is delivered each day. If a subscriber has purchased an annual subscription to the website, the monthly delivery is about 1/12 of the subscription price, as the number of days in each month differs – Iteras calculates this precisely. If a 6-month subscription has been purchased, a month’s delivery equals approx. 1/6 of the subscription price, and so forth.
It’s different if you have issues – this could be a traditional printed magazine or a digital one released on specific dates. In this case, the issue date determines which month the revenue belongs to. Again, if an annual subscription is purchased and there are 12 issues, then 1/12 of the revenue is recognized each time an issue is released. Note that this does not mean 1/12 is recognized each month. If, for example, the February issue is released on February 1st, and the March issue on February 28th, then 2/12 is recognized in February. Similarly, you may have magazines with more or fewer issues annually than the 12 in this example. The principle remains the same: divide the subscription price by the number of issues paid for, and recognize each part in the month of its issue date. If you have a large number of campaigns and many subscribers – some of whom cancel midway – keeping track becomes very complex.
With accrued revenue, you recognize income as you deliver the product. However, invoices are often sent for an entire year at once, and payments are received for the entire invoiced period. This too must be reflected in the accounting.
Therefore, you should create a balance account in your chart of accounts in your bookkeeping system called, e.g., “Pre-invoiced Subscriptions.” Here, you book the invoiced revenue each month. Any credits should be deducted – Iteras handles this automatically in the report. This account represents your liability to the subscribers, understood as invoiced but not yet delivered product. You then 'recognize' the accrued revenue each month. In practice, this means you credit your revenue account with the value of that month's delivery, and debit the “Pre-invoiced Subscriptions” account so the revenue portion corresponding to what's been delivered in the period is moved to the revenue account (i.e., recognized). This way, the amount moves from the balance sheet to the income statement, turning it from a liability into revenue.
You may now be asking how credits are handled. As mentioned, you don't need to track these separately as long as you use the numbers provided in the Iteras’ revenue report. This is because credited amounts are not accrued – they are deducted from invoiced revenue on the date the credit is issued.
The result is that you have two accounts which together provide a clear overview of the magazine’s financial status:
Pre-invoiced Subscriptions continuously shows revenue that has been invoiced but for which no products have yet been delivered. This can be seen as a liability to the subscribers. Ideally, this amount (minus receivables) is sitting in your bank account – if not, it reflects that the operation has been funded by borrowing from the subscribers, who are still owed delivery of the products they paid for.
Revenue (i.e., the accrued revenue) shows the revenue that has both been sold and delivered.
The final element is, of course, liquidity. A subscriber does not always pay at the moment the invoice is issued, thereby creating subscriber receivables. When you record your pre-invoiced revenue, you simultaneously post the amount to the receivables account, while payments are posted to the receivables account and debited to the bank account in the accounting system. This gives you an overview in the receivables account of what subscribers owe. Iteras also provides a report that can calculate receivable balances on a specific date and show the age of the debt.
Read more about Iteras’ revenue exports here(article is in danish)