• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Advertise
  • Submissions
  • About Us
  • Contact Us
  • Mar 6, 2021
  • Startup
    • Creating a Plan
    • Funding a Startup
    • Franchise Center
    • Getting Your Office Ready
    • Making Your Business Official
    • Marketing Your New Business
    • Personal Readiness
  • Run & Grow
    • Customer Service
    • Human Resources
    • Innovation
    • Legal
    • Operations
    • Risk Management
  • Leadership
    • Best Practices
    • Communication
    • Green Initiatives
    • Open Culture
    • Strategic Planning
    • People Skills
  • Sales & Marketing
    • Advertising and Lead Generation
    • Marketing Innovations
    • Marketing Plans
    • Online Marketing
    • Relationships
    • Sales Activities
  • Finance
    • Budgeting and Personal Finance
    • Payments and Collections
    • Tax and Accounting
    • Pricing Strategy
    • Working with Investors
    • Working with Lenders
  • Tech
    • eCommerce
    • Hardware
    • Software
    • Security
    • Tech Reviews
    • Telecom
  • Shop

SmallBizClub

Helping You Succeed

efile4biz banner
Home / Finance / Helpful Tips for Any Small Business to Prepare for ASC 606
Helpful Tips for Any Small Business to Prepare for ASC 606

Helpful Tips for Any Small Business to Prepare for ASC 606

2107 Views

Jul 24, 2020 By Devin Caldwell

On December 15, 2018, all small businesses were instructed to implement Accounting Standard Codification to file their 2019 income taxes. This change requires some preparation because it completely revamps the current revenue reporting guidelines.

The new standards are used for accounting revenue from customer contracts across all industries. However, it does not apply to financial instruments, insurance contracts, or lease contracts.

Establishing the ASC 606

The ASC 606 was established as a joint effort by the Financial Accounting Standards Board and the International Accounting Standards Board. The goal of this was to help simplify the preparation of financial statements.

The main principle of this new revenue recognition standard is depicting the transfer of the promised services or goods to a customer in the total amount that will reflect the consideration that any entity expects to be entitled in exchange for the services or products. This primary principle can be further broken down into two different parts that will answer the questions of how much and when.

Recognizing Revenue Under the ASC 606

The first principle is when to recognize revenue. According to the rule, revenue needs to be recognized after it has satisfied a particular contract obligation in a way that will reflect the transfer of the promised services or goods.

The second principle is how much revenue to recognize. The total amount of revenue that is recognized needs to equal what the business expects to receive based on the contract for the transferred services or goods.

The new revenue recognition standard provides a substantial increase in the use of personal judgment over the existing GAAP guidelines. This isn’t the only difference that small businesses are going to see as they transition from the rule-based ASC 605 to the principle-based ASC 606.

A significant change is that the AC 606 will get away from the standard that recognizes revenue once it is realized or realizable and earned. Using ASC 606 revenue will be known when there is some type of persuasive evidence of a particular arrangement. This is going to have a significant impact on companies that provide services or goods before both parties have signed a contract. In the past, guidance prohibited revenue recognition if there was no signed agreement in place.

ASC 606 Model to Recognize Revenue

The first step in this process is to identify the customer contract, which could be done orally, in writing, or as an implied agreement. The next step is to identify the performance obligations. A significant change in this is the challenge of interpreting.

According to the standard, the performance obligation is the promise in a contract with the customer for transferring a distinct service or good to them. An obligation is considered distinct if it meets two criteria.

The first is if it is capable of being distinct when a customer could benefit from the service or good without other obligations in the contract or can benefit if it is used with another available service or good. The second is distinct in contract, which means the services or good is identifiable within the contract from the other promises.

Step three is to determine the transaction price. A small business using variable payment arrangement will have certain adjustments. This transaction price is based on the total amount of consideration that is expected. This number may differ from the contract price. The variable considerations need to be estimated at the inception of the contract and include the transaction price consideration.

At this point, the transaction price should be allocated to each separate performance obligation related to the stand-alone selling price. The selling price is what the service or good sells for at the inception of the contract with variable considerations.

Are You Ready for ASC 606?

The new standards are complex and will change business processes. The impacts ASC 606 strategies may have on the departments in various companies need to be considered before taking any action.

Filed Under: Finance, Tax and Accounting Tagged With: Accounting

Devin Caldwell

Devin Caldwell

Devin Caldwell is a small business owner who loves helping other entrepreneurs succeed in the competitive business world. He owns three businesses and works as a consultant in his limited free time. Devin is also a husband and father of two beautiful children. If you want to work with Devin, reach out to him on Twitter: https://twitter.com/DevinCaldwell13.

Related Posts

  • 5 Small Business Solutions to Consider Right Now
  • 4 Upcoming Trends in Forensic Accounting 
  • Important: IRS Finalizes Changes to Payroll Tax Return Form 941

Primary Sidebar

bottom line ad

Random

You’re Being Sued for a Work Accident: Here’s What to Do 

Mar 5, 2021 By Cynthia Madison

Finding Your Confidence Starts With a Reality Check

Mar 5, 2021 By Fran Tarkenton

5 Signs Your Business is Doing Well Amid the Pandemic

Mar 5, 2021 By Gemma Moss

how-to-take-a-slice-of-the-3d-printing-pie

Lessons learned from COVID-19 and 3D printing

Mar 5, 2021 By Paul Gordon

embracing-cloud-security--infographic-

Beginner’s Guide to Understanding Cloud Security

Mar 5, 2021 By Gary Wilkinson

Footer

About Us

Small Biz Club is the premier destination for small business owners and entrepreneurs. To succeed in business, you have to constantly learn about new things, evaluate what you’re doing, and look for ways to improve—that’s what we’re here to help you do.

  • Facebook
  • LinkedIn
  • RSS
  • Twitter

Copyright © 2021 by Tarkenton Institute, Inc. All Rights Reserved | Terms | Privacy