Revenue recognition methods in Scoro

Revenue recognition is a principle used in accrual-basis accounting, stating that revenue is recognized as it is earned and expenses are recorded as they are incurred. This approach is crucial for matching the timing of your income and costs in longer-term projects, so you can confidently assess profitability for each period.

Scoro offers multiple revenue recognition methods, depending on how your business operates. The WIP report is the go-to tool that covers them all and summarizes the necessary data across your projects, but you can also use the Revenue tab and Quoted vs Actual table in the project view.

1. Percentage of completion method

The percentage of completion method is a relatively simple way to calculate recognized revenue based on project progress. It means you can recognize budgeted income proportionally to completed activities.

Project progress can be measured in two ways:

• By time
• By cost

For the percentage of completion methods to work, the project needs a reasonably accurate estimate of either the total duration or the total cost. If the budget or time/cost estimates change as the project progresses, these changes must also be reflected in Scoro to get accurate results.

1.1. Recognizing revenue based on time (efforts expended)

When recognizing revenue using the percentage of completion method based on time:

• The project progress is calculated based on time spent.
• The total duration of all completed activities is compared with the project’s total estimated duration.

Prerequisites for recognizing revenue based on time:

• The project must have budgeted revenue – this is taken either from the amounts on the quote or from the manual amounts entered in the project’s budget settings.
• The project must have an estimated duration – this is specified in the project modify view.

To track recognized revenue based on time in the WIP report, enable the following data columns in the report view:

• Estimated duration – estimated duration of the project
• Duration – total duration of all completed activities (events and time entries) linked to the project
• Project progress – proportion (percentage) of the project completed based on project duration, calculated as follows: duration / estimated duration
• Income (Budget) – budgeted income of the project
• Progress-based revenue – that's the recognized revenue calculated based on project progress and budgeted income, calculated as follows: project progress x income (budget)

You can also filter the WIP report by a specific date range to understand how much revenue can be recognized in a specific period – for example, in the previous month.

1.2. Recognizing revenue based on cost (cost-to-cost)

When recognizing revenue using the percentage of completion method based on cost, the project progress is established by dividing the sum of all the incurred costs by the estimated total cost of the project. 

Prerequisites for recognizing revenue based on cost:

• The project must have budgeted costs and revenue – these are taken either from the amounts on the quote or from the cost budget set up manually in the project’s budget settings.

To track recognized revenue based on costs in the WIP report, enable the following data columns in the report view:

• Cost (Budget) – budgeted cost of the project
• Cost – actual cost, i.e., the total sum of labor costs, bills, and expenses linked to the project
• Completed – proportion (percentage) of the project completed based on cost, calculated as follows: cost / cost (budget)
• Income (Budget) – budgeted income of the project
• Chargeable – recognized revenue based on incurred cost, calculated as follows: completed x income (budget)

2. Earned revenue method

2.1. Recognizing revenue based on earned revenue (units delivered and selling price)

Another way to recognize revenue in Scoro is to use detailed information about selling prices and completed activities in the system. In this case, the calculation is more accurate because it is based on the number of units sold (e.g., hours or pieces) and the respective selling prices of those units.

Unlike the percentage of completion method described above, the earned revenue method includes neither project progress nor total cost or duration estimates in the calculation.

In Scoro, you can retrieve the earned revenue information in multiple views:

• WIP report
• Quoted vs Actual table in the project view
• Revenue tab (under the Budget tab) in the project view

In the WIP report

In the WIP report, check the following data columns for earned revenue data:

• Earned revenue – the amount that is earned based on the completed activities and their respective selling prices (also includes outsourced services that have already been invoiced). Calculated as follows: Completed activities (hours) x selling price (hourly rate) + invoiced outsourced quote lines
• Earned revenue (Capped) – the amount that is earned based on the completed activities and their respective selling prices only up to the amount quoted to the client. For example, if you quoted 100 hours of work but actually worked for 120 hours, you only recognize the amount up to the initially quoted amount, i.e., 100 hours.

Example:

Let’s say you have a project with the following criteria and you would like to know what income to expect for the completed activities:

• You have quoted the client 100 hours of work with a selling price of 200 € per hour.
• In reality, you have already completed 120 hours of work.
• You have not invoiced your client yet.
• Your labor cost for the employee is 100 € per hour.

In the WIP report, you can see the Earned revenue and Earned revenue (Capped) columns. Notice that the Earned revenue value is higher than the Earned revenue (Capped) – that’s because the client was only quoted 100 hours.

In the Quoted vs Actual table

The Quoted vs Actual table in the project view includes only the Earned revenue data column, but you can compare the top value (earned revenue) with the bottom value (the budget from the quote) to see whether you’re within or over the budget.

In the Revenue tab

In the Revenue sub-tab (under the Budget tab) in the project view:

• The Earned column displays the earned revenue value.
• The Recognized column fields are filled in based on the earned revenue, but are capped at the budget. You can enter the actual recognized amount to override the values the system adds automatically.

Learn more about revenue recognition at the project level.