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 Code | Account Name | Account Type | Description |
---|---|---|---|
4000 | Services Revenue | Income | Revenue from selling IT services. |
4100 | Subscriptions Revenue | Income | Revenue from recurring software or service subscriptions. |
1100 | Accounts Receivable – Client X | Asset | Amounts owed by Client X for provided services or subscriptions. |
1000 | Cash/Bank | Asset | Cash in hand or bank balances. |
2100 | Deferred Revenue | Liability | Revenue received but not yet earned (prepayment). |
2400 | Sales Tax/VAT | Liability | Taxes collected from the customers that you owe to tax authorities. |
6500 | Payment Provider Fees | Expense | Payment 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.
Account | Debit | Credit |
---|---|---|
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.
Account | Debit | Credit |
---|---|---|
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.
Account | Debit | Credit |
---|---|---|
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.
Account | Debit | Credit |
---|---|---|
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.