I generally recognize services revenue when my services are invoiced to the client, which usually happens monthly according to my contracts. That is, I generally don’t recognize services work in progress as income (what Manager calls Billable time - movement until I invoice the service and it is debited to Accounts receivable.
Manager considers Billable time - movement (WIP) to be an income account, so the balance in that account is included in Net Income at the end of the financial period.
Is there a way to have Manager not recognize income on my contract hours until they are invoiced to the customer? Ideally, I would like to have an option to reclassify the Billable time - movement (WIP) account to be a contra-asset, if that is more in keeping with my business’s revenue-recognition practices. The wonderful Billable time feature is hard-coded to that account, and the only options under the Chart of Accounts settings for that account are Income and Expenses.
There are two way to go about this. First is to generate your P&L on cash-basis where billable time is not present.
Or, you can organize your Chart of Accounts and put Billable time - movement to the very end of the profit & loss statement and have a total separating billable time - movement from the rest of the accounts.
For example, you could create a total called Net profit (loss) before work in progress and have it before billable time movement account.
@jon, the general rule in accrual accounting is to recognize revenue when it is earned. Since you are in the US, this quote from the IRS is especially germane: “Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy.” By extension, the same would be true accounting period by accounting period or even day by day. How far you carry that, of course, depends upon what is reasonable. But however granular you get, the work in progress is income.
Assuming that you are authorized by the customer to perform the work, and that the customer has agreed in some way (verbal contracts are binding) to pay you for it, performance of the work itself establishes your right to payment. And the agreed rate fixes the amount. So you should recognize the revenue, even though not yet invoiced. Until it is invoiced, it represents both an asset–Billable time --and income–Billable time - movement. (To emphasize its purpose, I have renamed the account Billable time - work in progress.) Invoicing transfers the asset to Accounts receivable, another asset account, to reflect progress towards payment. At the same time, the income is transferred to the regular income account for billable time. (I’ve named mine Service sales - billable time.
The point is that without showing the work in progress in a temporary income account, the debit to the asset account cannot be matched by a credit.
This is no different from a manufacturer who has partially completed manufactured goods. Value has been added, so work in progress must account for it.
Now, if you use cash accounting, forget everything I said. Then, the only thing that matters is when you get paid.
@Tut, if the contract states, for example, that work is to be billed on the first of the following month, then the contractor has no right to receive income for December work until January. Moreover, a contract may be structured so the hourly rate changes based on the total number of hours during the month, with a lower (or higher) per-hour rate as the total number of hours rises; in that case, there’s no accurate way to value the work until the month has ended and the total number of hours for the month is known.
Is there an accounting reason why Billable time in progress can’t be debited to an asset and credited to a liability (contra-asset) account?
@Lubos: Breaking out Billable time - movement and having a separate total called Net profit (loss) before WIP sounds like a reasonable solution. But how do I do that? I really cannot figure out how to use the new Chart of Accounts features.
I think most accountants (and tax auditors) would argue that the right to receive the income was established when the work was performed. The fact the contract specifies later billing is immaterial. This situation is sometimes called accrued revenue, and there is a good discussion of it at Accrued revenue definition — AccountingTools, including a very relevant example.
IRS Publication 334 includes a couple somewhat relevant clauses on your issues about changing billing rates and uncertainty in pricing:
Estimated income. If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Change in payment schedule for services. If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference.
There are a couple of reasons. First, good accounting practice pairs contra accounts with regular accounts of the same class. So Fixed Assets is paired with its contra account, Accumulated Depreciation. But both are considered and llisted as asset accounts, with their net representing current book value of the fixed assets. A liability account is not considered a contra asset account, which brings up the second reason.
Work in progress is not a liability. A liability represents a legal obligation to pay another party. With work in progress, you have no obligation to pay anything to your customer. Quite the contrary, your customer has an obligation to pay you. That is why work in progress is an asset, because you have a reasonable expectation that it will generate cash in the future. The fact that you have not yet invoiced only means you have not yet made formal demand for payment in accordance with the terms of your contract or agreement with the customer.
One last thought: I think you are fighting an unnecessary fight. Balance sheets and income statements have been showing work in progress much like Manager does since the Medicis invented debits and credits in Florence during the renaissance. While you are, of course, free to develop any kind of management report you like for your own business, sometimes it is easier to adopt the tried and true. You will certainly fare better that way if you are subjected to an audit.
So in the example from the page you cite, it says:
ABC International has a consulting project with a large client, under which the consulting agreement clearly delineates two milestones, after each of which the client owes $50,000 to ABC. Since the agreement only allows for billing at the end of the project for $100,000, ABC must create the following journal entry to record reaching the first milestone:
Dr. Accrued billings 50,000
Cr. Consulting revenue 50,000
Even there, the first $50,000 isn’t considered accrued until the first milestone is reached. Surely there was plenty of work done before the milestone, but there is no right to receive the income until the milestone. In my case, the milestone is the end of the month, no?
I’m not sure whether that example is applicable. Billable time is about recording time you are likely to invoice client for.
If you have an agreement with a client where they pay you for results some fixed amount, you wouldn’t be using Billable time in the first place as there is no need to track the time (you will get paid the same amount regardless how much time you spend on the task)
My point was that the first 50,000 of billings was accrued before the invoice was sent. In the example cited, the invoice could not be sent until the entire project was finished. The example didn’t actually specify whether billing was to be by the hour or just by the milestone.
I prefer to include Billable Time as income because it is important when analysing the financial performance of a business for a specified period to take into account its production as represented by Billable Time. If the unbilled time is not taxable until is invoiced you can enter a reconciling adjustment on a tax return or at the end of the financial year transfer the balance of Work in Progress from the income account to a liability account named Deferred Income or Unearned Income.
Accounting is a recorder of actual circumstances, it is not a predictor or creator of future circumstances nor can it ever gazump contract law. Accounting is an information service to a Business NOT a controller of the Business. @Tut has made several statements which need to be reviewed
“general rule in accrual accounting is to recognize revenue when it is earned” - Yes, but only when you are legally entitled to the revenue. If a contract stipulates an invoicing point then you have no legal right until then otherwise you would be artificially inflating revenue. Large failing corporations did this practice (bringing forward revenue) in the past to hide their true results
Quoting the IRS “in which ALL EVENTS that fix your right to receive the income have occurred” An essential event is the contract stipulation of invoicing date, if that event hasn’t occurred then you don’t have the right to receive the income.
“work in progress is income” Incorrect - refer to point 6.
“performance of the work itself establishes your right to payment” once again incorrect, the terms of the contact determines the right to payment. On that superstition if two weeks work performance had been complete then there would be a right to payment - no, because that doesn’t comply with the contract.
“without showing the work in progress in a temporary income account, the debit to the asset account cannot be matched by a credit” Yes it can please refer to @tony’s post “to a liability account named Deferred Income or Unearned Income”
“This is no different from a manufacturer who has partially completed manufactured goods”. A manufacturer would transfer from Asset - Inventory Raw materials to Asset - Production Work-in-Progress to Asset - Inventory Finished Goods. At no time throughout this process has there been generated a Income Production Work-in-Progress entry. So how is it no different?
Business inputs (raw materials, labour, time, consultants) are Business inputs and you can’t change the accounting process or outcome because of the input. Lets take @jon situation a stage further. Lets assume there is a choice of outsourcing or in-house performance of the contract.
If its outsourced the contractor’s invoice doesn’t create an Income - Billable Work in Progress entry, so why should the in-house performance create an Income - Billable Work in Progress for exactly the same work.
Then we have the tax considerations, why would a business want to inflate its revenues with increased revenues before they are entitled to invoice those revenues. Ok, as @tony states you can make a reconciling adjustment on the tax return or transfer the Work-in-Progress to a liability account, but why have these complications when Manager can address the issue without needing special treatment.
Now for a couple of asides
a) “I think most accountants (and tax auditors) would argue that the right to receive the income was established when the work was performed” If any accountant/auditor put that to me (considering the contract terms) I would seriously be questioning their abilities - why would they advocate artificially increasing one’s taxable income. If any adjustment was to be made, you would transfer any related salary costs from the expense account.
b) “The fact the contract specifies later billing is immaterial” Tell that to a Judge. Accounting doesn’t gazump contract law. If one is going to put accounting above (superior to) the contract, then the role of accounting is not clearly understood
c) “IRS Publication 334 includes changing billing rates and uncertainty in pricing” Neither changing billing rates or uncertainty in pricing are at issue here so these clauses are completely irrelevant.
d) “A liability account is not considered a contra asset account” Incorrect, accounting standards requires finance leases (equipment, vehicles) to be fully taken up in the balance sheet, this involves an asset and corresponding (contra) liability account.
@jon asked “Is there an accounting reason why Billable time in progress can’t be debited to an asset and credited to a liability (contra-asset) account?” The simple answer is there is no reason why it can’t happen - but it would appear in Manager you will need to journal it to correct your accounts.
Wow! What a blast, @Brucanna. I have no interest in rebutting your points one by one. Let’s just agree that standards and practices vary in different jurisdictions. As you may know, the IASB and FASB have recently completed a huge project trying to standardize their guidance for recognizing revenue. So I don’t think you can fairly say that viewpoints that don’t match yours are necessarily wrong, just different.
Several of my comments were made from a viewpoint common in the US for the type of work @Jon does. Regardless of the agreed milestones or dates at which progress invoices might normally be submitted under a specific contract’s provisions, common business law also entitles one to recovery for work performed. Think of what might otherwise happen if a customer arbitrarily cancelled a contract (verbal or written) just before the agreed invoicing date. The provider would be entitled to recover costs and a reasonable profit on work performed to date. Otherwise, companies would be unilaterally cancelling contracts to avoid payment all the time.
Certainly there are differences of judgement in when all elements involved in recognizing revenue have been satisfied. But there is no question it can be appropriate long before an invoice is submitted, because to rigidly insist otherwise would condemn companies to misrepresenting their financial position. For example, imagine a large contract to be billed at completion several years down the road. It would be inaccurate to show no revenue from billings against that contract for several years. In fact, the tax man would probably accuse you of tax evasion.
Anyway, I was trying to offer some perspectives to help out another user. Hopefully, I did that.
I also have the requirement to record time that I intend, but don’t yet have the right to bill for.
Could this not be addressed by allowing the Billable time - movement account to be allocated to either a BS or P/L group? That would allow the balance sheet - only, option without breaking the current behavior.
No. That would violate the balancing principle of double-entry accounting. Billable time shows up in two places before invoicing:
As an asset in Billable time. This is the debit leg of the transaction. It is an asset because it holds the prospect of future realized income. The debit will be transferred to Accounts receivable upon invoicing. Hopefully, it will eventually be transferred to a bank or cash account when payment is received.
As income in Billable time - movement. This is the credit leg of the transaction. Whether you can yet submit an invoice under the terms of your contract or agreement is not relevant. You performed the work, generating value. Another name for this account might be Work in progress.
If you “don’t yet have the right to bill for” the work, it should not be recorded as billable time. The Billable Time tab is not a time clock. It implements an accounting function: recording time you do have the right to bill for at some point in the future (which could anywhere from now to many months from now. In other words, you have accrued the right to bill a specific customer for that time.
Consider two cases. In the first, a carpenter performs repair work at an hourly rate, agreeing with a homeowner to submit an invoice when the job is complete. That is billable time. The carpenter has accrued income, even though receipt for the income will come later. In the second case, the same carpenter builds a bookcase for inventory. The carpenter might include labor costs in a production order. But the time spent on the bookcase is not billable time. The labor cost remains part of the bookcase’s asset value in Inventory on hand until the bookcase is sold. Then it transfers back to Inventory - cost as an expense, while the sale price posts to Inventory - sales.
I get the point that it’s not a time recording system and that these entries shouldn’t be in the accounts yet.
I got to this point because of what looks like limitations in the reporting. I’m trying to report remaining amount on a sales order by deducting invoices and the time that I will be billing for.
Unless I’m missing something the Custom Reports are always a list of G/L transactions which means creating journal entries for sales orders and future billable time just in order to include them in a report with the invoices. I was hoping that the billable time entries would have helped here.
I want to be really clear about what I said. I did not say Manager was not a time recording system. It definitely can be used to record billable time. I said it was not a time clock, meaning a way of simply listing how much time was spent on a job. I said that because billable time entries are financial transactions. They have financial impacts within your accounting records. They don’t just produce a list.
@lubos’ suggestion of entering a zero hourly rate will avoid the financial impact, but the billable time entries will still be financial transactions.
… and that these entries shouldn’t be in the accounts yet.
Based on what you have written, the billable time entries should be in the accounts. The fact that you are trying to offset these against a sales order implies you have some form of agreement or contract with your customer under which you will eventually invoice for the work. Such a situation absolutely qualifies as billable time. Fully representative accounts would include such entries in order to completely describe both your position and performance. (That also implies using accrual basis accounting.)
Here, you will encounter difficulty, because Manager has no linkage between sales orders and any other form of transaction. Currently, sales orders are useful for documenting what you have agreed to deliver and as a source for copying to a sales invoice. But nothing is ever deducted from them. Calculations of remaining authorization under a sales order will have to take place outside Manager.
No, it does not, because there is no accounting transaction to be recording if you are just keeping track of unused authorization under a sales order. Journal entries imply actual debits and credits being posted to accounts, and there would be no such things.
But proper use of the Billable Time tab (and related, built-in reports) would give you the information you need to quickly make such calculations. I suggest experimenting with this in a test business. The Billable Time features are really quite powerful and intuitive. But you will need to get over your reluctance to consider billable time as something you are not entitled to invoice. You are—just not yet.
I appreciate the detailed response and it’s great that you try to help people this way. I don’t want to take up more of your time as I’m trying to make some assessment of the software features against a set of requirements and I feel that I have enough understanding of this feature.
As you stated then - there is not a timecard feature. It will always automatically accrue for any time recorded. Off-ledger time recording is supported by other accounting software, for example Quickbooks.
Custom reports can help within the limitation that they report G/L transactions. That was the point about creating journals where I appear to have offended your accounting principles - 2 entries with net zero effect in their own accounts which are then collapsed, purely as a workaround to the reporting limitations.
There doesn’t appear to be an API to the data that would allow for data combination in some external reporting tool.
Collecting data from 2 places then combining externally in Excel - sure that’s always an answer it just depends on the scale and the number of places where you have to jump out to Excel.
There is an API, it enables you to do most things a user can do. It is relatively low levels so requires some programing skills to use, and being low level, changes may occur with later versions of the software.
For reports “Report transformation” can be used to achieve much the same functionality but all from within Manager and readily moved to other Manager businesses.