Accrual Accounting & Revenue Recognition for Agencies, With Carson Pierce

Points of Interest

• 0:50 – 2:07 – Introduction: Marcel and Carson set up the challenge of revenue recognition in agencies, where payments and work schedules rarely align, creating distorted profitability metrics.
• 2:19 – 3:22 – Cash Accounting Pitfalls: Carson shares a client example where tracking only bank deposits caused wild swings in monthly profit and billable rate reporting, rendering metrics unreliable.
• 3:37 – 4:15 – Why Cash Accounting is Common: Marcel explains that firms default to cash-based accounting because it is cheaper and simpler, but acknowledges the operational limits for service businesses.
• 6:13 – 7:17 – Cash vs. Accrual Explained: The hosts break down the difference between cash accounting, which records money moving in and out, and accrual accounting, which aligns revenue and expenses with when they are actually earned or incurred.
• 8:35 – 9:26 – Project Example of Misalignment: Marcel illustrates how upfront deposits and final payments distort monthly reporting, showing why cash accounting fails for project-based agencies.
• 11:07 – 12:13 – Complex Expense Timing: They highlight how vendor terms and delayed payments further complicate accrual accounting, making profitability appear very different depending on the lens used.
• 13:42 – 14:58 – Payroll Timing Issues: Carson notes that biweekly payroll cycles can skew monthly reporting, making accrual adjustments essential for accurate performance measurement.
• 15:12 – 16:20 – Why Invoice Dates Don’t Work: Marcel warns that many accountants mistakenly use invoice schedules for accrual recognition, which misrepresents how much work is truly complete.
• 16:38 – 19:48 – Four Earned Value Methods: Marcel outlines four ways to measure progress for revenue recognition: time versus timeline, time versus budget, burndown via story points, and subjective project manager input.
• 21:38 – 23:16 – Forecasting and Performance Indexing: They stress the importance of pairing earned value with forward-looking forecasts and using cost or schedule performance indexes to spot projects at risk.
• 24:23 – 26:04 – Phasing Projects for Accuracy: The conversation explores breaking projects into major phases to better reflect real effort, while avoiding overly complex setups that burden teams.
• 27:25 – 29:19 – Accountant Impact and Liabilities: They emphasize that proper accrual requires manual journal entries and careful tracking of deferred revenue and liabilities, ensuring agencies avoid misleading profitability and balance sheet risks.

Show Notes

• Podcast Episode: Revenue Recognition in Agencies (with Rich Brett)
• Blog: Understanding Cost-Performance Indexing
• Free Tool: Cost Variance Calculator

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