14 Revenue Recognition

This chapter contains these topics:

Section 14.1, "About the Revenue Recognition Process,"
Section 14.2, "Understanding Revenue Recognition,"
Section 14.3, "Revenue Reconciliation,"
Section 14.4, "Journal Reclassification,"
Section 14.5, "General Ledger Document Types."

14.1 About the Revenue Recognition Process

Revenue Recognition is the accounting rule that defines revenue as an inflow of assets, not necessarily cash, in exchange for goods or services and requires the revenue to be recognized at the time, but not before, it is earned. You use revenue recognition to create G/L entries for income without generating invoices.

Generally, you use revenue recognition when:

Work is finished and you have earned the income, but you do not need to bill a customer
You want income statements and balance sheets to reflect the amounts earned for a realistic picture of the company's financial status
You need to reallocate internal costs

To calculate revenue (actual or accrued) for the current period, you must create journal entries. The amounts related to these entries appear on your income statements and balance sheets when you complete the revenue recognition process. You use the recognized revenue amounts for projections and to review the profitability or liability of specific departments in your organization.

Revenue recognition consists of the following tasks:

Understand revenue recognition
Generate preliminary G/L journal entries
Work with G/L batches

You can complete the revenue recognition and billing processes separately or together as a combined process. When you combine the processes, you can recognize revenue prior to or during the billing process, depending on how you define the system constants.

When you combine the processes, the associated G/L batch is assigned to the invoice batch to contain the G/L journal entries associated with the invoice journal entries. The associated G/L batch is written to the Account Ledger when the invoice journal entries are written to the A/R Ledger and Account Ledger.

14.2 Understanding Revenue Recognition

When you process revenue recognition, the system creates G/L journal entries to update the Account Ledger (F0911) with revenue, cost, and margins. You can also create correcting reclassification G/L journal entries, depending on how you define the Journal Reclassification option in the Billing Constants (P48091).

Service Billing offers a range of journal processes that allow you to select the mode that best suits your organization's accounting needs. These modes, controlled by you Journal Generation Control option in the Billing Constants, are as follows:

Invoice Processing Only

Choose this mode if your organization does not require revenue to be recognized independently of the billing cycle.

Revenue Processing Only

Choose this mode if your organization is only billing interdepartmentally and does not require customer receivables updates in the Accounts Receivable Ledger (F0311).

Invoicing with Revenue

Choose this mode to allow revenue to be recognized independently of the billing process.

Actual revenue is credited and accrued receivables (unbilled A/R) is debited at the time final G/L journal entries are written to the Account Ledger (F0911) and posted by the General Journal Post (P09800) program.

Accrued receivables is credited and trade A/R is debited at the time the final invoice journal entries are written to the Account Ledger (F0911) and posted by the General Journal Post (P09800) program.

Invoicing with Revenue Reconciliation

Choose this mode to allow accrued revenue to be recognized independently of the billing cycle or if you mark up the revenue amount independently of the invoice amount and need to clear the variance from accrued receivables at the end of the billing cycle.

Accrued revenue (unbilled) is credited and accrued receivables (unbilled A/R) is debited when final G/L entries are written to the Account Ledger (F0911) and posted by the General Journal Post (P09800) program.

Actual revenue is credited, accrued revenue is debited, accrued receivables is credited, and trade A/R is debited when final invoice journals are written to the Account Ledger (F0911) and posted by the General Journal Post (P09800) program.

14.3 Revenue Reconciliation

You can manage the revenue recognition and billing process with or without revenue reconciliation. You use revenue reconciliation to ensure that variances do not exist between recognized revenue and billing amounts. Variances between recognized revenue and billing amounts can exist when:

You recognize revenue and generate invoices at different times
You mark up revenue and billing amounts independently

14.3.1 Reconciliation for Timing Differences

If you do not recognize revenue and generate invoices at the same time, the timing difference creates a variance in unbilled accounts receivable.

Figure 14-1 Timing the Revenue Recognition and Invoice Generation

Description of "Figure 14-1 Timing the Revenue Recognition and Invoice Generation"

For example, you plan to invoice a project only after the customer approves and accepts the completed project. The project takes three months to complete and you recognize revenue for the project each month. Because of the timing difference between when you recognize revenue (each month) and generate invoices (after completion) for the project, an unreconciled balance exists in unbilled accounts receivable.

Three months later, when you bill the project:

Trade accounts receivable and total revenue amounts for the project are the same
The variance in unbilled accounts receivable nets to zero

In the case of a timing difference, over time, all variances are reconciled and net to zero for unbilled accounts receivable.

14.3.2 Reconciliation for Independent Revenue and Invoice Mark Up

If you use the same markup rules for revenue and billing, generally no variance exists between the recognized revenue and billing amounts. However, if you mark up revenue and invoice amounts independently, a permanent variance between recognized revenue and billing amounts can exist.

If you do not want variance balances to exist when you mark up revenue and invoice amounts independently, you can use revenue reconciliation to ensure that:

Variances do not exist between recognized revenue and billing amounts
Balances for unbilled accounts receivable and unbilled revenue are zero

For example, your company might renegotiate an hourly rate for rental equipment. Although the new rate is 75 dollars an hour, your company continues to bill 70 dollars an hour until the negotiations are complete.

For 2 hours of equipment use, the invoiced amount is 140 dollars. If revenue is recognized at the new rate, the revenue amount is 150 dollars. Without reconciliation, a 10-dollar variance remains in unbilled accounts receivable.

Without revenue reconciliation, the system creates debits and credits respectively for the following journal entries:

Entry	Description
Revenue recognition	150 dollars for unbilled accounts receivable and unbilled revenue
Billing	140 dollars for actual accounts receivable and unbilled accounts receivable

With revenue reconciliation, the system records, reverses, and reconciles recognized and actual revenue amounts. In the previous example, the system would create debits and credits respectively for the following journal entries:

Entry	Description
Revenue recognition	140 dollars for unbilled accounts receivable and unbilled revenue
Revenue reconciliation	140 dollars for unbilled revenue and accounts receivable 150 dollars for unbilled accounts receivable and actual revenue
Billing	150 dollars for actual accounts receivable and unbilled accounts receivable

14.4 Journal Reclassification

Depending on how you set the Journal Reclassification option in the Billing Constants (P48091) and the Update processing option for Workfile Revisions (P4812), you can reclassify, or change the account information, for a Billing Workfile (F4812) transaction.

Journal reclassification exists within Service Billing to allow you to reclassify the original cost entry to a different account and let the system automatically create the correcting entries in the Account Ledger (F0911).

When you set the Billing Constant to allow journal reclassification, the system creates the correcting journal entries in the Account Ledger during journal creation.

For example, an employee might charge time to two different work orders during a pay period. When entering time for the pay period, the employee makes an error. After the accounting department processes payroll transactions, you review the costs and discover the employee's data entry error.

You correct the error by changing the work order numbers on the workfile transactions in the Billing Workfile using Workfile Revisions (P4812). With journal reclassification, when you run G/L Journal Generation (P48132), the system creates correcting journal entries along with the preliminary journal entries for revenue and costing. The system creates adjusting journal entries in the Account Ledger to reverse the original account and update the new account.

You can identify the correcting journal entries by their document type. The system also uses the same pay type (PDBA code) of the workfile transaction for journal reclassification, such as 101 for regular pay, unless you use the PDBA Code Override in the Billing Constants.

In addition to creating adjusting entries in the Account Ledger, if you are correcting a workfile transaction that originated from payroll, the system creates an adjusting entry in the Payroll Transaction History (F0618) file during the Create G/L Entries (P48198) process. Burden is not eligible for reclassification.

14.5 General Ledger Document Types

As you complete the billing and revenue recognition processes, the system can create seven different types of G/L entries. You can identify the origination of journal entries using the following document types:

Entry	Description
EU (Revenue)	Journal entry created during revenue recognition
AJ (Adjustment)	Adjusting journal entry created during revenue recognition for journal entries previously recognized for revenue
BA (Billing Adjustment)	Reclassification of a billable source journal entry which originated from accounts payable or general accounting
RI (Invoice Default)	Journal entry created during billing
T2 (Payroll Labor Distribution)	Reclassification journal entry which originated from payroll labor
T4 (Labor Billing Distribution)	Reclassification journal entry which originated from labor billing
T5 (Equipment Distribution)	Reclassification journal entry which originated from equipment billing

14.5.1 Before You Begin

Set the independent revenue/invoice control in the system constants (P48091)
Set the journal generation control in the system constants to revenue recognition and invoice processes with or without revenue reconciliation
Define account derivation rules (P48126) for revenue recognition
Define markup rules (P48096)
Generate Billing Workfile (F4812) transactions

14.5.2 What You Should Know About

Topic	Description
Alternate displays and system constants	Many of the forms you use in the Service Billing system change in functionality and appearance, depending on the way you set up your system constants. For example, if you set up your system constants for revenue recognition and billing (invoicing), the forms and functionality apply to both processes.