If you have revenue streams with recurring charges that cover multiple months, LivePlan gives you two options:
- To spread those charges out (generally referred to as accrual-based accounting)
- To recognize the revenue immediately when you receive it (generally referred to as cash-based accounting)
To change the setting for multi-month charges:
1. Click on the Options tab:
2. Select the option you prefer under Multi-month charges:
3. Click Save Changes in the upper-right corner of the Options menu.
How do I choose?
If you aren't sure which option to choose, Spread out multi-month charges is usually the right answer, and it is the default setting. That follows best practices in accounting. Since you are getting paid up front in the first month for services you will render over multiple months, it's generally proper to put that money on the balance sheet and recognize the revenue a month at a time. This is referred to as accrual-based accounting.
For example, when our customers buy 12-month subscriptions to LivePlan, we count 1/12 of the total fee each month as revenue in our financial statements. The remaining balance is kept on our Balance Sheet as Prepaid Revenue until it is fully utilized at the end of the subscription year.
However, LivePlan also offers the option to Recognize revenue immediately, in case your accounting system is set up that way. This is called cash-based accounting, and it is intended for businesses like food trucks and other companies that always get paid at the time of purchase, so there's no cash timing to manage.
Make sure your forecast and actuals use the same type of accounting
It's important to be sure that your choice in LivePlan matches the choice you made in your accounting system. Otherwise, the data on the Dashboard will be misleading.
When you set up QuickBooks Online or Xero, you are given a configuration option to use either cash-based or accrual-based accounting. If your accounting system is cash-based and you choose the option in LivePlan to Spread out multi-month charges (accrual method), your results will look like you are making much more money than expected, but the variance will just be matter of timing.