When you use a system like Iteras, you gain the ability to book your revenue as required by law—namely, on an accrual basis. It’s virtually impossible to do this correctly without a system that keeps track of what needs to be accrued. In this article, we describe how to book correctly using accruals.
Accrual accounting means that revenue is recognized at the time to which the revenue relates. In this context, “relates to” means the delivery of the product. If you have a digital publication without issues—i.e., a website that is continuously updated with new content and has no formal releases—then, in principle, a partial delivery occurs every day. If a subscriber has purchased a one-year subscription to the website, the monthly delivery is roughly 1/12 of the subscription price—“roughly” because months do not all have the same number of days, and Iteras calculates this precisely. If a 6-month subscription has been purchased, one month’s delivery equals approx. 1/6 of the subscription price, and so on.
It’s different if you publish issues—this could be a traditional printed magazine or a digital one that is released on specific dates. Here, you look at the issue date to determine which month the revenue belongs to. If, again, a one-year subscription is purchased and there are 12 issues, 1/12 of the revenue is recognized each time an issue is released. Note that this does not mean that 1/12 is recognized every month. If, for example, the February issue is released on February 1, and the March issue on February 28, then 2/12 is recognized in February. Similarly, some magazines may have fewer or more issues per year than the 12 in this example. The principle remains the same: divide the subscription price by the number of paid issues, and recognize each part in the month in which the issue date falls. If you have a large number of different campaigns and many subscribers, some of whom cancel mid-term, keeping track quickly becomes very complex.
With accrued revenue, you recognize income as you deliver the product. However, invoices are often sent for an entire year at a time, and payments are received that cover the entire period invoiced. This must likewise be reflected in the accounting.
Therefore, you create a balance-sheet account in the chart of accounts in your accounting system—for example, “Pre-invoiced Subscriptions.” Each month, you book the invoiced revenue to this account. Any credits must be deducted—Iteras does this automatically in the report. This account therefore represents your liability to subscribers, understood as product that has been invoiced but not yet delivered. In addition, you recognize the accrued portion each month. In practice, this means you credit your revenue account with the value of that month’s delivery and debit Pre-invoiced Subscriptions, so the portion of revenue corresponding to what has been delivered in the period is moved to the revenue account (i.e., recognized). In this way, the amount moves from the balance sheet to the income statement—turning it from a liability into revenue.
You might now wonder how credits are handled. As noted, you don’t need to do anything special to track them, as long as you use the figures generated by Iteras’ Revenue report. The underlying principles are described in the article about the Revenue report.
The result of all this is that you have two accounts that together provide a clear overview of the magazine’s position:
Pre-invoiced Subscriptions continuously shows revenue that has been invoiced but for which no goods have yet been delivered. Ideally, this amount (minus receivables) sits in your bank account—if not, it reflects that operations have been financed by “borrowing” from subscribers, to whom you still owe delivery of the products they have 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 post your pre-invoiced revenue, you simultaneously post a corresponding amount to the receivables account, while payments are posted to the receivables account and debited to the bank account in the accounting system. In this way, the receivables account gives you an overview of subscribers’ total unpaid invoices. Iteras also has a Subscriber balance report that can calculate receivable balances as of a specific date and provide an overview of the ageing of the debt.