Cash receipts to billed sales and progress payments are two methods of accounting for revenue recognition. Revenue recognition is the process of recording the income earned from selling goods or services to customers. The timing and amount of revenue recognition depend on the terms and conditions of the sales contract and the industry standards.
Cash receipts method is a simple and conservative way of recognizing revenue. It records revenue only when cash is received from the customer, regardless of when the goods or services are delivered. This method is suitable for small businesses that deal with cash transactions and have no credit sales or long-term contracts.
Progress payments method is a more complex and realistic way of recognizing revenue. It records revenue based on the percentage of completion of the project or contract, regardless of when cash is received from the customer. This method is suitable for large businesses that deal with long-term contracts that involve multiple deliverables and payments over time.
To illustrate the difference between these two methods, let us consider a scenario where a company sells a software package to a customer for $100,000. The contract specifies that the customer will pay 50% upfront, 25% upon delivery, and 25% after testing and acceptance. The company estimates that it will take 12 months to complete the project, and it incurs $80,000 of costs evenly throughout the year.
Using the cash receipts method, the company will recognize revenue as follows:
| Month | Cash Received | Revenue Recognized | Cumulative Revenue |
|---|---|---|---|
| 1 | $50,000 | $50,000 | $50,000 |
| 2-11 | $0 | $0 | $50,000 |
| 12 | $50,000 | $50,000 | $100,000 |
Using the progress payments method, the company will recognize revenue as follows:
| Month | Percentage of Completion | Revenue Recognized | Cumulative Revenue |
|---|---|---|---|
| 1 | 8.33% | $8,333 | $8,333 |
| 2 | 16.67% | $8,333 | $16,667 |
| … | … | … | … |
| 11 | 91.67% | $8,333 | $91,667 |
| 12 | 100% | $8,333 | $100,000 |
As you can see, the cash receipts method results in a lumpy and delayed recognition of revenue, while the progress payments method results in a smooth and timely recognition of revenue. The progress payments method also matches the revenue with the costs incurred, which reflects the economic reality of the project.
To implement these methods in Excel, you will need to use some formulas and functions. For the cash receipts method, you will need to use the IF function to check if cash is received in a given month, and then record the revenue accordingly. For the progress payments method, you will need to use the SUM function to calculate the cumulative percentage of completion, and then multiply it by the contract price to get the revenue.
