| The primary accounting consideration is the Matching | | | | software company invoices the customers at the end |
| Principle: your costs must be expensed or capitalized in | | | | of the month by adding up the consultants' time and |
| the same period in which you recognize the | | | | costs, and revenue is immediately recognized. |
| corresponding revenues. | | | | 2) Fixed price contracts: Revenue should be |
| So if you do offer software as a subscription service, | | | | recognized in proportion to completion of the contract. |
| you will need to capitalize and depreciate the R&D and | | | | A good indicator of percentage of completion is the |
| other costs that went into producing the software, | | | | ratio of man-months consumed to budgeted |
| using reasonable estimates, so that the correct | | | | man-months, assuming that there are no other |
| proportions of the cost are matched to the associated | | | | significant costs. If there are other significant costs |
| revenues. | | | | such as third party software licenses, they should be |
| Another instance of the Matching Principle, per | | | | taken into account while computing the percentage |
| Sarbanes-Oxley, is that you should not ship an | | | | completion of the contract. The budgeted costs are |
| upgrade with new "features" to software that you've | | | | reviewed and revised each month to ensure proper |
| already sold and recorded revenues for, or you will | | | | recognition of the revenue. |
| have to restate your previous earnings to recognize | | | | 3) Software products sale- perpetual licenses: |
| some of the revenue in the current period. | | | | Revenue should be recognized upon delivery of the |
| There are four types of revenues in case of a | | | | software license to customers. |
| software company and each has its own peculiarities: | | | | 4) Software subscriptions or maintenance contracts: |
| 1) Time and material based contracts for software | | | | Here the revenue should be recognized over the |
| services: Revenue should be recognized based on the | | | | period of the subscription or maintenance contract. |
| time spent and expenses incurred. Generally the | | | | |