Revenue Recognition

Revenue recognition is an accounting methodology that helps determine the revenue to be recognized over the period of time that a service is consumed. The principle requires that businesses recognize revenue when it is earned (accrual accounting), or when the corresponding resources are consumed, rather than when payment is received (cash accounting).

Determining revenue in a usage-based billing system, especially with a prepaid subscription model, can be complex. This model involves purchasing credits for services in advance, with usage spread out over multiple months. To ensure accuracy in reporting, revenue must be reported conservatively by allocating the purchase price by each month of usage, rather than booking all of it in the initial month when payment is received.

Amberflo offers a solution to this challenge by providing detailed revenue reports for accounts with prepaid subscribers. These reports show how much revenue should be booked per month (recognized revenue) and how much should be deferred (deferred revenue), making it easier to manage and track the prepaid subscription model.

In Amberflo, prepaid credits (and commitments) are the booked revenue, while the actual consumption is the recognized revenue.

Amberflo provides this data to downstream systems (e.g NetSuite) for revenue recognition:

1. Prepaid transaction and commitment amount can be mapped to booking.

2. The invoice object contains all the data needed for:

   • Total price for metered consumption (recognized revenue)
   • Breakdown of the billable consumption. Amount covered by prepaid balance and overage
   • Breakdown by SKU

3. API for dashboards, revenue waterfall, and recognized revenue
   https://docs.amberflo.io/reference/post_payments-cost-usage-cost

Example use case

Consider a $50,000 yearly commitment where overages are billed monthly.
A $50,000 credit is created in Amberflo, which will be the "booked" revenue.

Over the year, consumed (billable) usage ("recognized revenue") will be shown in the invoice, and on the Amberflo billing dashboards for tracking how much was consumed from the credits balance and how much is remaining ("recognized" vs "deferred").

The billing periods are monthly, so if there are no credits left, the remaining amount will be billed to the customer's payment method.