Revenue Accounting in the Age of E-Commerce: Exploring Its Conceptual and Analytical Frameworks

Jonathan C. Glover and Yuji Ijiri

No 2000-21, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: This paper explores "revenue accounting" in contrast to traditional "cost accounting." Revenue accounting is to serve information needs of managers and investors in planning and controlling a firm's sales activities and their financial consequences. Weaknesses of traditional accounting have become particularly evident recently, for example, the lack of 1) revenue mileposts, 2) revenue sustainability measurements, and 3) intangibles capitalization. Some tentative remedies are considered. Several revenue mileposts are explored to gauge progress in earning revenues and a Markov process is applied to an example involving mileposts. Revenue momentum, measured by the exponential smoothing method, is examined as a way of getting feedback on revenue sustainability; and its use in fixed vs. variable revenues is illustrated. A project-oriented approach in a manner similar to capital budgeting and to Reserve Recognition Accounting is proposed by treating each customer as a project. Standardization of forecasts are also considered as an important way of bypassing the capitalization issue. The paper emphasizes at the end the need to develop a conceptual framework of revenue accounting and, as a tentative measure, proposes five basic postulates and five operatiional postulates of revenue accounting.

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