Income Tracking Documentation


In an accrual accounting system, the integration between Accounting, Order/Invoice Management, and Payments is critical for maintaining accuracy across processes, especially when revenue is recognized upon issuing an invoice, regardless of when payment is received.

Chart of accounts

Here`s how to set up your accounts for income under accrual accounting, focusing on having multiple Accounts Receivable accounts—one for each client—within your general ledger:

Account CodeAccount NameAccount TypeDescription
4000Services RevenueIncomeRevenue from selling IT services.
4100Subscriptions RevenueIncomeRevenue from recurring software or service subscriptions.
1100Accounts Receivable – Client XAssetAmounts owed by Client X for provided services or subscriptions.
1000Cash/BankAssetCash in hand or bank balances.
2100Deferred RevenueLiabilityRevenue received but not yet earned (prepayment).
2400Sales Tax/VATLiabilityTaxes collected from the customers that you owe to tax authorities.
6500Payment Provider FeesExpensePayment providers like Stripe or PayPal charge fees for processing transactions.

1. Example Transaction Flow: Recording Services Revenue (Postpaid Services/Subscriptions)

Step 1: Issuing an Invoice for Services Rendered

IT consultancy completes a service for Client X and issues an invoice for $2,000 in services, plus a 10% sales tax ($200), for a total of $2,200.

In this step, the Accounts Receivable account is increased by the full invoice amount ($2,200), and the Sales Tax Payable account reflects the tax liability, which you will later remit to the tax authority.

AccountDebitCredit
Accounts Receivable – Client X (1100)$2,200
Sales Tax Payable (2400)$200
Services Revenue (4000)$2,000

Step 2: Receiving Payment for the Invoice

When Client X pays the $2,200 invoice, and the payment is processed through a payment provider that charges a 3% fee (total fee: $66), you record the payment minus the fee.

AccountDebitCredit
Cash/Bank (1000)$2,134
Payment Provider Fees (6500)$66
Accounts Receivable – Client X (1100)$2,200

Summary of Invoicing and Income Workflow:

  • Issue the Invoice: Debit Accounts Receivable and credit Services Revenue to recognize the revenue earned and track the outstanding payment.
  • Receive Payment: Debit Cash/Bank and credit Accounts Receivable to close the client's outstanding balance.

2. Example Transaction Flow: Deferred Revenue (Prepaid Services/Subscriptions)

Step 1: Recording Prepayment for Future Subscription Periods

Let`s say Client X subscribes to the Enterprise Plan for $2,000 (12 months), and there is a 10% sales tax. The total payment will be $2,200, but the $200 tax is not part of your revenue—it`s a liability.

Payment providers like Stripe or PayPal charge fees for processing transactions. These fees should be recorded as expenses. Let`s assume the payment provider charges a 3% fee on the $2,200 transaction ($66). You record the payment minus the fee.

AccountDebitCredit
Cash/Bank (1000)$2,134
Sales Tax Payable (2400)$200
Payment Provider Fees (6500)$66
Deferred Revenue - Customer X (2101)$2,000

Step 2: Recognizing Earned Revenue After Subscription Period (for 1st month)

Assuming the subscription is $2,000 for 12 months, you'd recognize $166.67 for the first month.

AccountDebitCredit
Deferred Revenue - Customer X (2101)$166.67
Subscriptions Revenue (4000)$166.67

Summary of Prepayments and Income Workflow:

  • Manage Prepayments (if any): Use Deferred Revenue to record payments for services/subscriptions not yet provided, and then move that to Revenue once the work is completed.
  • This example includes taxes and fees.
  • The payment provider fees are recorded separately as expenses, not deducted from revenue.

Which Model to Choose?

Prepaid Subscriptions (Deferred Revenue) are more common for long-term plans or annual subscriptions, especially when customers are incentivized to pay upfront in exchange for discounts or better terms.

Postpaid Services/Subscriptions (Accounts Receivable) are typical for monthly billing or shorter subscription cycles, where customers are billed after consuming the service.