The ASC 606 and Revenue Recognition Principle
Let’s start with a quick refresh of ASC 606. ASC 606, short for Accounting Standards Rule 606, is a financial reporting standard that follows GAAP guidelines (generally accepted accounting principles), which were established by the Financial Accounting Standards Board (FASB). This rule dictates how and when revenue is recognized, reported, and disclosed in financial statements.
The revenue recognition principle is an accounting concept that states revenue isn’t recognized when a product or service is delivered, but when the customer gains control over it, which could be before, during, or after delivery.
So what is revenue recognition vs revenue reconciliation?
Revenue recognition is the process of recognizing or reporting income as earned, matching the revenue from contracts to the expenses related to generating those sales. This ensures that a company’s financial records are accurate and transparent, aiding in decision-making and providing investors with an up-to-date picture of a business’s financial situation.
Revenue reconciliation is an accounting process where businesses compare revenue records of two or more separate systems to verify they match. By reconciling revenue, accounting teams can spot errors, such as typos or mistakes in data entry, that would otherwise cause problems.
Revenue records typically come from a business’s accounting system, point-of-sale system, and any other external sources. All of these sources need to agree with each other. Otherwise, the organization cannot accurately reflect its financial health, disclose revenue on financial statements, or file reports with the IRS.
For revenue reconciliation to work, you need to have adopted an effective, software-driven process. You will need a platform like Docyt, which has the data structure to track revenue and perform checks and balances between different systems on a continuous basis.
Why does this matter?
Accurate Financial Reporting:
Revenue recognition ensures that financial statements accurately reflect the performance of the company. This is vital for investors, lenders, and stakeholders to make informed decisions.
Accurate revenue data enables informed decisions about resource allocation, expansion, and strategic planning.
Revenue reconciliation is an internal control mechanism to prevent errors, fraud, and irregularities in revenue recording safeguarding a company’s assets and reputation.
Adhering to the Revenue Recognition Principle (ASC 606) is a legal requirement.
Adhering to reconciliation and recognition principles boosts investor confidence and can lead to better access to capital and a higher market valuation.
Having a deep understanding of revenue reconciliation, revenue recognition, and how they relate to each other is vital for the financial health and success of your business. If your accounting practices are rooted in the ASC 606 revenue recognition principles, you can rest assured that you will produce consistent and accurate financial records. Revenue reconciliation acts as a safety net by aligning all numbers and serves as an internal control mechanism to identify discrepancies. By combining and mastering these two principles, you are guaranteed to produce financial data that enables sound decision-making, while instilling trust in your company’s financial integrity among stakeholders.
Docyt AI Simplifies Revenue Accounting
Do you ever grapple with the complexities of revenue accounting as you navigate the relationship between “revenue reconciliation” and “revenue recognition“? As a finance professional, having a working knowledge of these principles will ensure your company is adhering to general accounting practices (GAAP) and help you better position your business for success. In this blog post, we will explore revenue reconciliation, revenue recognition accounting, and why they are important to your business.
Docyt AI helps businesses keep track of their revenue accounting with confidence. Get real-time financial insights, reconcile daily revenue, and stay on top of revenue reports and bank deposits. Revenue is the most important factor for business success, and Docyt AI can help you manage it.
If you’re searching for a tool to manage your revenue accounting, schedule a free consultation today.