Executive Summary
This article explains how our Oil & Gas accounting software follows industry-standard accounting practices when handling production revenue and owner distributions.
- Revenue received from first purchasers is recorded as a liability, not immediate income.
- Deposits are placed in a separate clearing account to avoid commingling funds.
- Funds are allocated only when a Run is closed, ensuring accurate ownership distribution.
- Backdating revenue recognition is technically possible but not recommended due to audit and compliance risks.
- Production reporting is separated from accounting dates to maintain both operational clarity and financial integrity.
This approach ensures fiduciary responsibility, audit readiness, and clean financial reporting for operators and owners alike.
Overview
Our Oil & Gas accounting software follows industry best practices and standard accounting principles for handling production revenue, joint interest distributions, and operator allocations.
Key principle: revenue received from a first purchaser is not immediately the operator’s income. It is held until ownership allocations are calculated and distributions are processed.
Initial Revenue Deposit – Proper Accounting Treatment
When oil or gas is sold, the first purchaser remits payment to the operator. Upon receipt, the deposit is recorded as:
- Debit: Revenue Deposit (bank account – typically a separate sweep/clearing account)
- Credit: Revenue Clearing Account (liability – clearing/contra account)
Why this is a liability
At the time of deposit, the operator does not yet know final ownership allocation. The funds must be processed and distributed according to ownership interests. For that reason, the Revenue Clearing Account functions as a liability reflecting funds held for distribution — not earned operator income.
Segregated Deposit Account (Audit-Preferred Best Practice)
In our experience, CPAs and audits strongly prefer production revenue deposits to be placed into a separate bank account rather than commingled with general operating funds. This functions like a sweep/clearing account and strengthens internal controls.
Benefits include:
- Clear separation of fiduciary funds
- Cleaner audit trail and simpler reconciliation
- Reduced risk of commingling
- Stronger compliance posture
Revenue Processing at Run Close
Revenue becomes properly allocated when a Run is closed. During Run Close, the system:
- Allocates revenue based on ownership percentages
- Applies expenses and any netting rules
- Calculates net amounts by owner
- Determines the operator’s portion and each owner’s distribution
At that point, the Revenue Clearing liability is relieved and income/payables are properly recognized.
Common operator misunderstanding
Operators sometimes assume “the money is mine when it hits the bank.” In reality, the operator only earns their portion after the Run is processed because only then do we know who owns what share of the funds.
Advanced Posting & Backdating
Some operators request backdating the processing to match the deposit date. Our software can support this through advanced posting options, but only at closing and it is not recommended as a standard practice.
Backdating increases audit complexity and can create situations where income appears recognized before the deposit is made. This does not align with standard accounting best practices and can raise concerns during a review or audit.
Production Date Reporting vs Accounting Dates
Our system separates Production Date reporting from Accounting Date posting. Operators can run production reports by production month independent of the accounting dates used for financial posting. This provides operational accuracy without compromising accounting controls and audit traceability.
Summary of Recommended Best Practices
- Deposit production revenue into a separate clearing bank account
- Record deposits as a liability (Revenue Clearing) until processed
- Close Runs on a regular cycle (typically monthly) to allocate ownership
- Avoid backdating unless there is a clear, controlled accounting need
- Use Production Date reporting for operational reporting independent of accounting dates
Result: a clean, audit-ready workflow that reflects the operator’s fiduciary role and ensures owners receive the correct funds once allocations are known.
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