Revenue follows the work
Under accrual accounting, revenue is recorded when the work is done, not when the invoice is sent or the money arrives. Billing and payment can run ahead of the work or behind it, and the books need a place for the difference.
Three balance sheet accounts handle it. Deferred revenue holds money received for work not yet done. Unbilled revenue holds work done but not yet invoiced. Accounts receivable holds invoices sent but not yet paid.
Deposits and advance payments
A customer deposit is a promise to deliver, so it is a liability until you do. Say a customer pays a $6,000 deposit on a $20,000 project. Record $6,000 as deferred revenue. As you complete work, move the earned portion to revenue. If the project is half done, $10,000 is revenue, and the deposit has been applied against it.
Keep deposits out of operating income so you do not treat borrowed customer money as profit. It also keeps cash planning honest, since the work still has to be paid for.
Milestones and time and materials
Milestone billing ties invoices to approved events, such as completion of a design or a delivery. Record the invoice when the milestone is approved, and tie it to the contract line. If the work runs ahead of the milestone, recognize the earned part as unbilled revenue.
Time-and-materials billing charges hours at a rate plus approved expenses. Reconcile the hours in your time system to the hours on the invoice, and check that the rates agree with the contract. Differences between time worked and time billed are lost revenue, and they show up in the realization rate.
Unbilled work
At month end, list work performed but not invoiced: hours logged, milestones reached, or deliverables completed. Record the earned amount as unbilled revenue so the month shows what you earned. Reverse it when you invoice, so you do not count it twice.
Project margin
Assign the revenue and the direct costs of each project to the project. Show the margin as revenue less labor, subcontractors, and direct expenses. Compare it with your estimate. A project that lost money tells you whether the problem was scope, price, or delivery, and the answer improves the next quote.
A short monthly report with revenue, cost, and margin by project, plus the remaining budget, is enough for most firms.
Frequently asked questions
Do I need accrual accounting for this?
Cash-basis books record revenue when paid, which can misrepresent long projects. If you bill in stages or carry deposits, accrual gives a truer picture.
What if a customer cancels after paying a deposit?
Follow the contract. Refund the unearned part and keep what you have earned, and record each correctly.
How do I handle a change order?
Track it separately with its status and price, and recognize revenue as the approved work is performed.