Accurate revenue recognition is a cornerstone of reliable financial reporting. Most accounting professionals agree that accrual-based entries are the most accurate way to record revenue. This means that sales are recorded when the obligation to the customer is fulfilled (ie: the goods are shipped). Cash-based accounting is different. Under that method you record sales when the payment is received, which for most ecommerce businesses equates to when the order is placed.
For ecommerce businesses, accurately recording revenue can be tricky, because there is a lot going on, and to further complicate the matter, each selling platform has its own way of presenting the numbers.
When using Shopify, it is important to understand that Shopify Financial Summary data is based on order date, not when the products were shipped.
The implication of this for companies who typically ship the same day an order is received is likely to be minimal. The accounting team will simply need to watch for month-end cutoff issues and adjust the financials accordingly at the beginning and end of each month, in order to ensure that revenue is properly stated in each accounting period.
However, for companies that typically ship the product days, weeks, or even months after the order is placed, the implications of booking the revenue based on order date could be extreme. Simply put, the Shopify revenue will be incorrectly stated each month, because it is essentially being booked on a cash basis. This can lead to the company not passing an audit, or even having their valuation reduced in the process of being acquired by another company – the stuff of nightmares for financial teams and business owners.
Companies who are hoping to go public (or be acquired at some point in the future) should take steps to move to proper Revenue Recognition for their Shopify sales now, in order to give the truest picture of their revenues.
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The Shopify deferred revenue and fulfillment-based revenue recognition feature (when enabled) automatically recognizes the revenue based on Ship Date, making your job of properly recognizing the revenue from Shopify a snap.
