The end of the year has its own meaning for each of us. It’s the time when we start summarizing everything we achieved, failed or succeeded. Although for some of us, especially for small business owners, the end of the year and the reduction of all accounts and financial work is a real headache. In order to make it easier for you and help you better understand the subject, we will explain the meaning and application of an unavoidable term when it comes to managing finances.
We almost finished 2020 (yeah!), and it is super important to know your real revenue and when it should be recognized, and what is the exact cost of sales for the same period.
This is called Revenue recognition. In UAE, we respect IFRS 15: We recognize revenue when a performance obligation is satisfied by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service) and not when the cash is received. According to the matching principle, the revenue and associated costs must be reported in the same accounting period.
What is Revenue? It is the income generated from normal business operations and includes discounts and deductions for returned merchandise.
Money received on behalf of a client in order to pay fees or a supplier is not an income. It should be part of your balance sheet, not your P&L, and the account will be net once the supplier is paid. This “client’s money” will not generate any sales or any expenses for your business.
In order to close your books and to have the real “image” of your company, you need to make sure all revenue has been well recognized and that all related expenses are as well.
We hope that this short article can make your life easier and guide you through a successful end to this difficult year. The CTC team wishes you a happy, successful, and much better year than the previous one. Merry Christmas and Happy New Year.