Set up a revenue recognition schedule in QuickBooks Online Advanced

Learn how to set up an automatic schedule to help with revenue recognition in QuickBooks Online Advanced. 

Revenue Recognition is a generally accepted accounting principle (GAAP) that defines how and when you recognize revenue. For all businesses on an accrual basis, revenue is recognized when it’s earned, not when money is exchanged. A common scenario for this is a pre-paid or subscription service.

In this article, you'll learn about: 

• Why Revenue Recognition is important
• How to set up Revenue Recognition
• How to edit and customize a Revenue Recognition schedule
• Issue a credit memo for an existing revenue recognition invoice
• More about service intervals and frequency
• How the posting frequency is calculated every month

Why Revenue Recognition is important

Here are some business models that may use revenue recognition.

Find out about cash and accrual accounting methods in QuickBooks Online.

Set up Revenue Recognition in QuickBooks Online Advanced

Set up revenue recognition to automatically schedule moving revenue from your chosen liability account to your chosen asset account. You can then take advantage of revenue reporting.

Step 1: Turn on revenue recognition

1. Go to Settings , then select Account and settings.
2. Select Sales. 
3. In Products and services, select Edit ✎.
4. Turn on Revenue recognition.
5. Select the Frequency: Daily or Monthly.
6. Select Save, then Done.

Note: Revenue can now be recognized on a daily or monthly basis. 

Step 2: Add a service with revenue recognition 

1. Go to Settings and select Products & services (Take me there). 
2. Select New, then select Service.
   Note: If you're adding for the first time, select Add a product or service, then select Service.
3. Fill out the details. 
4. Select I recognize revenue for this product daily or monthly.
   Note: The frequency will vary based on what you've selected in Step 1: Turn on revenue recognition.
5. Choose a Liability Account, and in Service Duration enter the number of days, weeks, months, or years over which the revenue should be recognized.
   Note: You can enter up to 3652 days for daily frequency, up to 521 weeks for weekly frequency, up to 120 months for monthly frequency, or up to 10 years for yearly frequency.
6. Select a Service Interval from the dropdown ▼.
7. Select Save and close. 

Step 3: Create an invoice with revenue recognition

Now, create an invoice for this service you just set up. The Service Date on the invoice will let QuickBooks know when to start the revenue recognition schedule.

1. Go to + New and select Invoice. 
2. Fill out your invoice details. Be sure to add the service you just created. 
3. Under Service Date, select the date this service will start.
   Note: The service date can be after the close books date.
4. Select Save. 
   Note: Once the invoice is created, the schedule will start at the end of the month selected in the Service Date.
5. Next to the service line item, select View Revenue Recognition. 
6. The schedule for your revenue recognition for that service displays.

Edit and customize a Revenue Recognition schedule

QuickBooks Online automatically updates your revenue recognition schedule after you add a service with revenue recognition and create an invoice or sales receipt with revenue recognition. You can edit and customize your revenue recognition schedule, too. For example, adjust the service duration period for an item at a transaction level, adjust an entire schedule, or make changes to an item’s price. Each time you make changes, your revenue recognition schedule automatically adjusts.

Edit a service item’s duration at the transaction level

1. Go to Sales and select Invoices (Take me there).
2. Open an existing invoice with the service item to edit it, or select Create invoice.
3. Fill out your invoice, including:
   • The name of the service under Product/Service.
   • The date the service starts under Service date. The service date can be after the close books date.
4. When you’re done filling out your invoice, select Save.
5. Select the View Revenue Recognition link.
6. In the Revenue Recognition panel, select Edit.
7. In the Service Duration field, enter a new period for your schedule.
   Note:
   • You can enter up to 3652 days for daily frequency, up to 521 weeks for weekly frequency, up to 120 months for monthly frequency, or up to 10 years for yearly frequency.
   • You can only edit posted entries that occur after the close books date.
8. Review or revise your automatically updated schedule, then select Apply.

Edit a service item’s schedule at the transaction level

1. Go to Sales and select Invoices (Take me there).
2. Open an existing invoice with the service item to edit it, or select Create invoice.
3. Fill out your invoice, including:
   • The name of the service under Product/Service.
   • The date the service starts under Service date. The service date can be after the close books date.
4. When you’re done filling out your invoice, select Save.
5. Select the View Revenue Recognition link.
6. In the Revenue Recognition panel, select Edit.
7. In the Amount Recognized column, change one or more values in the current schedule as long as it occurs after the close books date set under accounts and settings.
   Note: The schedule auto balances for open, unedited months.
8. Review or revise your automatically updated schedule, then select Apply.

Edit a service item’s price at the transaction level

1. Go to Sales and select Invoices (Take me there).
2. Open an existing invoice with the service item to edit it, or select Create invoice.
3. Fill out your invoice, including:
   • The name of the service under Product/Service.
   • The date the service starts under Service date. The service date can be after the close books date.
4. Under Rate, enter a new price.
5. When you’re done filling out your invoice, select Save. 
6. Select the View Revenue Recognition link.
7. Review or revise your automatically updated schedule. To make changes, select Edit.
   Note:
   • A new price higher than the original price automatically increases recognition amounts for future open months.
   • A new price lower than the original price, but still higher than the total amount recognized until now, reduces recognition amounts for future open months.
   • A new price lower than the total amount recognized until now, automatically shows a negative recognition amount in the current month.
   • To remove negative recognition amounts, manually adjust the amounts from the Revenue Recognition panel.
8. Select Apply.

Issue a credit memo for an existing revenue recognition invoice

You can close or adjust an existing schedule and then issue a credit memo or a refund receipt. For example, let’s say you’ve already recognized CA $200.00 for the service, but you want to issue a complete refund for CA $1200.00.

1. Go to Sales, then Invoices (Take me there).
2. Open an existing invoice to edit it.
3. Select the View Revenue Recognition link.
4. In the Revenue Recognition panel, select Edit.
5. In the Schedule section, do one of the following actions:
   • Recognize now: This is available under More actions . You can stop all future revenue recognition entries for the item by recognizing all the remaining unrecognized amount in the current open month. In other words, post an amount to the entry so that the income account matches the total price of the item to close out a schedule.
     Note: Remember, in this example, you've already recognized CA $200.00 for the service, so you need to post CA $1,000. That way, the income account will total CA $1200.00. You also need to verify, in this example, that all future entries are zero amounts. When you issue a credit memo for CA $1200, all the income is reversed. When you issue a credit memo of CA $500, only CA $500 of the income is reversed.
   • Keep the schedule as it is.
   • Customize the schedule for your needs.
6. Select Apply.
7. Create and issue a credit memo or a refund receipt.

Run the Revenue Recognition report

You can see the billed and recognized amounts in the Deferred Recognition Detail for each column. 

1. Go to Reports (Take me there).
2. In the search bar, search for and open Revenue Recognition Report. 

Customize or filter the report as you see fit. 

More about service interval and frequency 

Service Interval and Duration define how a company sells its product/service. For example: An annual subscription sold at CA $1200 can be set up as 12 months or 52 weeks.

Revenue Recognition Frequency is how often you recognize revenue for a product or service. It’s automatically set to monthly, but you can change it at any time. Once updated, it applies to all the future transactions. For example, an annual subscription sold at CA $1200 with a daily frequency will be prorated based on the number of days in a month.

Posting Frequency is when we post the recognized amounts to the books. We post all automatic revenue recognition entries at the end of the month.

How the posting frequency is calculated every month

For a service item that is priced at CA $1200, the recognized revenue will be automatically moved to the income account at the end of the month. The monthly recognized amount varies depending on the recognition frequency selected in Settings . 

Formula: Total price of the item / # of frequencies for the duration * # of frequencies per month.

Here's an example of how the recognized revenue is calculated and posted at the end of the month for different frequencies: