My explanaton was only inteneded to cover basics, as it seemed that not everyone in the thread had an accounting background.

The article you reference is oriented towards large companies who want to find accounting software to extensively automate various types of software and services sales and how they link to the general ledger. The previous poster did not even have a general ledger.

However I read thru the article and all the comments and found nothing more complicated than what I said. But again I was trying to give a basic explanation so people would not think they have to have escrow accounts at their bank!

>Turns out, it's much more complex than either of us are saying. http://www.buildingkeystones.com/2012/01/revenue-recognition-in-software-delivery/
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>Best thing...consult an accountant with expertise in software subscription accounting.
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>>I think there is some misunderstanding. There is no physical escrow bank account.
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>>I am not a CPA, but I have written and designed numerous accounting systems.
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>>There are two ways a business can determine its profit. The first way is called the "cash" method. If you do not deal with selling from inventory, you can use this method which is much simpler. It works just like your checking account. The money you deposit is income and the money you spend is expenses. if you bill a client but they have not paid, it is irrelevant to your profit and loss. Similarly if a vendor sends you a bill, and you have not yet paid it, it has no effect on your profit and loss. At the end of the year you pay taxes to the IRS based on your profit. if you wish to show your bank a p/l, same thing.
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>>The second way of calculating profit and loss is called "accrual". It is important to understand that profit and loss according to the IRS and your bank, under the accrual method, has ALMOST NOTHING to do with cash in or out of your bank. Acrual means you accrue income and expenses when when they occur, rather than when money changes hands.
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>>For example, I bill you $100. You have not paid. Nonetheless according to the IRS and the bank, I now have a profit of $100. The fact that there is $0 in my bank is not relevant. Similarly, if you send me a bill of $100, I enter an expense of $100 regardless of whether I have paid the bill yet or not.
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>>Since the cash is not that relevant, it would be easy to show a big profit to your bank by billing a million dollars for the next 100 years woth of subscriptions, or showing a big loss to the IRS by entering the next 100 years of rent bills under this week's expenses. Therefore the rule is that the income or expense is considered officially part of your profit and loss, or "booked", in the month that the services were provided. Uh-oh - if bill you $1200 for a year long subscription, the rules would say that realy I am am providing $100 of service each month. I would enter that into my profit and loss or tax calculations. The fact that I have the money now means nothing.
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>>Whne you read of large companies pulling a financial fast one, what they are doing is moving around when they record income and expenses to get the outlook they desire. Hence auditors. However accounting is as much an art as science, and even in good faith there can be some variances in how experts think things should be recorded.
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>>This is also how a very profitable company goes bankrupt -- the profits are on paper from bills sent, which does not indicate if they were ever paid.