Invoicing is the form that’s easiest to convert to actually receiving the payment. But what happens when the work we are invoicing for is not yet complete? This is where progress invoicing comes in. Progress invoicing allows us to bill for part of an estimate in the future, essentially breaking up the work into multiple invoices.
However, this can pose a problem when it comes to revenue recognition principles. Revenue should generally be recognized when the work is complete and the customer has received the goods or services. If we are invoicing for work that is not yet complete, we may be prematurely recognizing revenue, which can distort our financial statements.
To use progress invoicing in QuickBooks Online, we need to first turn on the progress invoicing feature in our settings. Then, we would create an estimate for the total amount of work to be completed and use the progress invoicing tool to bill for part of that estimate as the work is completed.
While the progress invoicing tool in QuickBooks Online is easy to use, it’s important to understand the underlying accounting principles and when progress invoicing may be necessary for your business. It’s also important to be aware of the potential pitfalls of progress invoicing, such as premature revenue recognition, and ensure that your financial statements accurately reflect the true financial position of your business.
which means that revenue should be recognized when the work is done or the services are rendered, regardless of when payment is received. This is because we want to match the revenue with the expenses incurred to earn that revenue, which gives us a more accurate picture of our profitability.
On the other hand, if we’re invoicing for work that hasn’t been completed yet, we need to be careful about when we recognize the revenue. There are a few different ways to approach this, but the two main methods are percentage of completion and completed contract.
Under the percentage of completion method, we recognize revenue as the project progresses based on the percentage of the project that has been completed. This method requires us to estimate the total revenue and costs for the project, and then recognize revenue and expenses as a proportion of the total as the work is completed. This method is generally more accurate, but it requires more work to estimate and track progress.
Under the completed contract method, we recognize revenue and expenses only when the project is completed. This method is simpler, but it can result in lumpier revenue recognition, which may not reflect the actual progress of the project.
Ultimately, the method we use depends on the nature of the project and the industry we’re in. It’s important to understand the different methods and their implications so we can choose the one that best reflects our business and financial goals.
Progress invoicing can be a useful tool for businesses that provide services or products over a period of time. It allows them to bill their clients periodically for the work done or goods delivered so far, instead of waiting until the end of the project. This can help improve cash flow and provide better visibility into project status.
However, progress invoicing can also raise some accounting challenges related to revenue recognition. The basic principle of revenue recognition is that revenue should be recognized when it is earned, regardless of when payment is received. In other words, revenue should be recorded in the financial statements when the goods or services have been provided, not when the invoice is issued or the payment is received.
In the case of progress invoicing, the question arises as to when revenue should be recognized. If the work is already completed, then revenue can be recognized at the time of the invoice. But if the work is still in progress, then revenue cannot be recognized until the work is completed and the client has accepted it.
To address this issue, businesses can use different methods to recognize revenue, such as the percentage of completion method or the completed contract method. Under the percentage of completion method, revenue is recognized as work is completed, based on the percentage of the project completed. Under the completed contract method, revenue is recognized only when the project is completed and the client has accepted it.
Regardless of the method used, businesses need to be careful in how they recognize revenue to ensure that it is in compliance with accounting standards and reflects the economic substance of the transaction. Progress invoicing can be a helpful tool, but it should be used in conjunction with sound accounting practices to ensure accurate and transparent financial reporting.
Overall, progress invoicing can be a useful tool for businesses that perform work over an extended period of time and need to collect payments periodically. However, it can also present challenges in terms of revenue recognition and proper accounting treatment. It’s important for businesses to carefully consider the nature of their work and agreements with clients when deciding whether to use progress invoicing and how to record the associated revenue. Understanding the concepts of revenue recognition and percentage of completion accounting can also be helpful in navigating these issues.