Revenue recognition is a principle used in the accrual basis of accounting, stating that revenue is recognized as it is earned and expenses are recorded as they incur. This approach is crucial for matching the timing of your income and your costs in longer-term projects, so that profitability could be confidently assessed for each chosen period.
Scoro offers you multiple methods for revenue recognition, depending on the way your business operates. The WIP report is the go-to tool that covers them all, summarizing all necessary data across your projects for you.
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Percentage of completion method
The percentage of completion method is a relatively simple way of calculating recognized revenue based on project progress. It means you can recognize budgeted income proportionally to completed activities.
Example: You have completed 10% of your project, which means your project progress is 10% and you can recognize 10% of the revenue.
Project progress can be measured in two ways: by time or by cost.
For the percentage of completion methods to work, the project needs to have a reasonably accurate estimate of either the total duration or the total cost.
Note! If the budget or time/cost estimates change in the course of the project, these changes must also be reflected in Scoro to get accurate results.
Let’s have a closer look at both approaches.
1. Recognizing revenue based on time (efforts-expended)
In this scenario, project progress is calculated based on the time spent. The total duration of all the completed activities is compared to the total estimated duration of the whole project.
Example: You have completed 20 hours worth of work in a project with an estimated duration of 100 hours. This means your project progress is 20%.
The budgeted income for this project is 100,000 €. Since this method recognizes revenue proportionally to the project progress, recognized revenue is 20% x 100,000 = 20,000 €.
Note! Prerequisites for this method to work in Scoro:
- The project budget is enabled (tick the ‘Compare budget estimates with actual results’ option in the project Modify view).
- The project has budgeted revenue (taken either from the amounts on the quote or from the simple budget).
- The project has an estimated duration (specified in the project Modify view)
The following columns reflect the necessary information in the WIP report:
- Estimated duration – estimated duration of the project
- Duration – total duration of all the completed activities (events and time entries) connected to the project
- Project progress – proportion (percentage) of the project completed based on project duration
- Project progress = duration / estimated duration
- Income (Budget) – budgeted income of the project
- Progress-based revenue – recognized revenue calculated based on project progress and budgeted income
- Progress-based revenue = project progress x income (budget)
Customize your WIP report view with the following data columns to conveniently track recognized revenue based on time:
You can also apply a date range filter to understand how much revenue can be recognized in a specific period (for example, in the previous month):
2. Recognizing revenue based on cost (cost-to-cost)
In this scenario, project progress is calculated based on cost. The sum of all the incurred costs is divided by the estimated total cost of the project to establish the project progress, which is then used to calculate recognized revenue.
Example: You have a three-month project with an estimated budget of 200,000 €. The budgeted total cost of this project is 150,000 €. By the end of the first month, you have already spent 75,000 € on labor costs and outsourced materials required to deliver the project.
This means that the project progress is 75,000 / 150,000 = 50%, allowing you to recognize 50% of the budgeted income. The recognized revenue is therefore 50% x 200,000 = 100 000 €.
Note! Prerequisites for this method to work in Scoro:
- The project budget is enabled (tick the ‘Compare budget estimates with actual results’ option in the project Modify view).
- The project has budgeted cost and revenue (taken either from the amounts on the quote or from the simple budget).
The following columns reflect the necessary information in the WIP report:
- 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
- Completed = cost / cost (budget)
- Income (Budget) – budgeted income of the project
- Chargeable – recognized revenue based on incurred cost
- Chargeable = completed x income (budget)
Customize your WIP report view with the following data columns to conveniently track recognized revenue based on cost:
Income to date method
1. Recognizing revenue based on income to date (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 scenario, the calculation is more accurate, it is based on the number of units sold (e.g. hours or pieces) and the respective selling prices of these units.
The income to date method differs from the percentage of completion method described above, in that neither the project progress nor the total estimates of cost or duration are included in the calculation.
Example 1: You have quoted the client 100 hours of work at a selling price of 200 € per hour. You have already completed 50 hours of work.
So your income to date is 50 hours x 200 € per hour = 10,000 €.
Example 2: You have quoted the client 100 hours of work at a selling price of 200 € per hour. In addition, you have quoted the client 10 pieces of outsourced product at a selling price of 300 € per piece. You have already invoiced the client for the 10 pieces of product and delivered (but not invoiced) 50 hours worth of work.
So your income to date is 10,000 € (50 hours x 200 € per hour) + 3,000 € (10 pcs x 300 € per pcs) = 13,000 €.
In Scoro, it is possible to retrieve this information from the WIP report and from the Quoted vs Actual table in the project view.
Note! Prerequisites for the income to date method to work in Scoro:
- The project budget is enabled (tick the ‘Compare budget estimates with actual results' option in the project Modify view).
- The project budget is based on ‘Quoted amounts’.
- All of the tasks are linked to quote lines.
The columns to note in the WIP report:
- Income to date (Actual) – the amount that is earned based on the completed activities and their respective selling prices (also includes outsourced services that have been invoiced already).
- Income to date = completed activities (hours) x selling price (hourly rate) + invoiced outsourced quote lines
- Income to date (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.
- 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 both Income to date (Actual) as well as Income to date (Capped):
Note that the Income to date (Actual) value is higher than the Income to date (Capped). This is because the client was only quoted 100 hours.
The Quoted vs Actual table in the project view shows only Income to date (Actual):