Understanding the Contract Liability Accounting Process
You can create and send invoices for products or services that you will deliver in the future or over a range of time. Use contract liability accounting to generate accounting entries that defer revenue recognition based on a revenue recognition date and proration method that you select.
The supported revenue recognition basis includes contract date, order date, ship date, and a range of dates (from/to or start/end). When you use a date range as the revenue recognition basis, you can select different methods of proration.
This section discusses:
Accounting entries with contract liability.
Contract liability proration methods.
These examples illustrate how the system generates accounting entries with contract liability for the following scenarios:
Non-Contract Liability
Invoice details are:
Bill line amount: 90.00 USD.
Revenue recognition basis: invoice date.
Accounting Date: 8/15/2000.
Accounting Date
Account Type
Debit Amount
Credit Amount
8/15/2000
AR
90.00 USD
8/15/2000
Revenue
90.00 USD
Simple Contract Liability (Single Date for Recognizing Revenue)
Invoice details:
Bill line amount: 90.00 USD.
Revenue recognition basis: ship date.
Ship date: 9/30/2000.
Accounting date: 8/15/2000.
Accounting calendar: monthly.
Deferred accounting date code: last day of period.
Accounting Date
Account Type
Debit Amount
Credit Amount
8/15/2000
AR
90.00 USD
8/15/2000
Contract Liability
90.00 USD
9/30/2000
Contract Liability
90.00 USD
9/30/2000
Revenue
90.00 USD
Complex Contract Liability (Date Range for Recognizing Revenue)
Invoice details:
Bill line amount: 90.00 USD.
Revenue recognition basis: charge from/to date range.
Charge from date: 8/15/2000.
Charge to date: 11/30/2000.
Accounting date: 8/15/2000.
Accounting calendar: monthly.
Deferred accounting date code: first day of month
Accounting Date
Account Type
Debit Amount
Credit Amount
8/15/2000
AR
90.00 USD
8/15/2000
Contract Liability
75.83 USD
8/15/2000
Revenue
14.17 USD
9/1/2000
Contract Liability
25.00 USD
9/1/2000
Revenue
25.00 USD
10/1/2000
Contract Liability
25.83 USD
10/1/2000
Revenue
25.83 USD
11/1/2000
Contract Liability
25.00 USD
11/1/2000
Revenue
25.00 USD
Note: Proration of the invoice amount over accounting periods is accomplished by the proration method value Spread by Days Within Range, using the following formula: Period amount = line amount x number of days in period / number of days spanned by date range.
For example:
Period amount = 90 (line amount) x 31 (number of days in period of October) / 108 (number of days spanned by date range from 8/15 to 11/30).
Calculate debit amount of 25.83 USD to contract liability for 10/1/98 as follows: 90 x 31 / 108.
You can establish date-range contract liability calculation method defaults at the system, business unit, or bill type level according to your business needs. These are the five methods for calculating contract liability that you define the recognition basis with a date range:
Term |
Definition |
|---|---|
Method 1 |
Spread by days within range. |
Method 2 |
Spread evenly across all periods. |
Method 3 |
Spread evenly using a midperiod rule. |
Method 4 |
Spread partial periods by days with remainder spread evenly. |
Method 5 |
User-defined proration. |
Method 1: Spread by Days Within Range
The system divides the number of revenue days that are in the period by the number of days that are in range. Accounting periods are based on a detail calendar. Revenue amounts may differ by period depending on the number of days that are in each period. The rounding difference is applied to the period with the largest revenue amount. For example:
Invoice amount: 12,000 USD.
Beginning date: 4/15/98.
Ending date: 4/14/99.
Total number of days in the range: 365.
Period
1
2
3
4
5
6
7
Detail calendar dates.
4/4-5/5/98
5/6-6/3/98
6/4-7/3/98
7/4-8/5/98
8/6-9/3/98
9/4-10/5/98
10/6-11/4/98
Number of days in accounting period.
32
29
30
33
29
32
30
Number of days in range per period.
21
29
30
33
29
32
30
Invoice amount revenue calc.
12000 x (21 / 365)
12000 x (29 / 365)
12000 x (30 / 365)
12000 x (33 / 365)
12000 x (29 / 365)
12000 x (32 / 365)
12000 x (30 / 365)
Period
8
9
10
11
12
13
Detail calendar dates.
11/5-12/3/98
12/4-1/5/99
1/6-2/3/99
2/4-3/3/99
3/4-4/5/99
4/5-5/5/99
Number of days in accounting period.
29
33
29
28
33
30
Number of days in range per period.
29
33
29
28
33
9
Revenue calc.
12000 x (29 / 365)
12000 x (33 / 365)
12000 x (29 / 365)
12000 x (28 / 365)
12000 x (33 / 365)
12000 x (9 / 365)
Method 2: Spread Evenly Across All Periods
The system divides the total invoice line amount by the number of periods in the range. Revenue is recognized in equal portions for each accounting period regardless of the number of days in each period. The rounding difference is applied to the first period.
Invoice line amount: 12,000 USD:
Beginning date: 4/15/98
Ending date: 4/14/99
Total number of accounting periods in the range: 13
Period
1
2
3
4
5
6
7
Detail calendar dates.
4/4-5/5/98
5/6-6/3/98
6/4-7/3/98
7/4-8/5/98
8/6-9/3/98
9/4-10/5/98
10/6-11/4/98
Revenue calc.
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
Period
8
9
10
11
12
13
Detail calendar dates.
11/5-12/3/98
12/4-1/5/99
1/6-2/3/99
2/4-3/3/99
3/4-4/5/99
4/5-5/5/99
Revenue calc.
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
12000 x 1 / 13
Method 3: Spread Evenly Using a Midperiod Rule
The system applies rules to partially recognizable periods to determine whether they are fully recognizable or excluded from the calculations. The start and end dates, relative to the midperiod day, are used to determine whether the first and last periods are included or excluded. In the first period, if the start date is prior to the midperiod day, the entire period is fully recognizable. And, in the first period, if the start date falls after the midperiod day, no revenue is recognized. In the last period, if the end date is prior to the midperiod day, no revenue is recognized. In the last period, if the end date falls after the midperiod day, the period is fully recognizable. The rounding difference is applied to the first fully recognizable period.
Invoice details are:
Invoice line amount: 12,000 USD.
Beginning date: 4/15/98.
Ending date: 4/14/99.
Total number of accounting periods in the range: 13.
Period
1
2
3
4
5
6
7
Detail calendar dates.
4/4- 5/5/98
5/6- 6/3/98
6/4 7/3/98
7/4 8/5/98
8/6 9/3/98
9/4 10/5/98
10/6 11/4/98
Number of days in accounting period.
32
29
30
33
29
32
30
Number of days in range per period.
21
29
30
33
29
32
30
Revenue calc.
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
Period
8
9
10
11
12
13
Detail calendar dates
11/5 12/3/98
12/4 1/5/99
1/6 2/3/99
2/4 3/3/99
3/4 4/5/99
4/5 5/5/99
Number of days in accounting period.
29
33
29
28
33
30
Number of days in range per period.
29
33
29
28
33
9
Revenue calc.
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
12000 x 1 / 12
0
In this example, the final period has nine revenue days. The system calculates the midperiod day of period 13 by dividing the number of days that are in the accounting period (30) by two. The midperiod day in period 13 is the 15th day of the period. Because nine is less than the midperiod day, no revenue is recognized in period 13.
Method 4: Spread Partial Periods by Days With Remainder Spread Evenly
The system calculates recognized revenue in steps. First, the system prorates partial periods by dividing the total number of days in the period by the total number of days in range. The revenue that is recognized for partial periods is deducted from the total. The remainder revenue is divided equally between the total number of fully recognizable periods.
Invoice details:
Invoice line amount: 12,000 USD.
Beginning date: 4/15/98.
Ending date: 4/14/99.
Total number of accounting periods in range: 13.
Total number of days in range: 365.
Number of revenue days in first period: 21.
Number of revenue days in last period: 9.
Period
1
2
3
4
5
6
7
Detail Calendar dates
4/1-4/30/98
5/1 -5/31/98
6/1-6/30/98
7/1 -7/31/98
8/1 -8/31/98
9/1 -9/30/98
10/1 -10/30/98
Number of days in accounting period
30
31
30
31
31
30
30
Number of days in range per period
16
31
30
31
31
30
30
Revenue Calc.
A) Ivc Amt - 16 / 365
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
Period
8
9
10
11
12
13
Detail Calendar dates
11/1 - 11/30/98
12/1 - 12/31/98
1/1 - 1/31/99
2/1 - 2/28/99
3/1 - 3/31/99
4/1 -4/30/99
Number of days in accounting period
30
31
31
28
31
30
Number of days in range per period
30
31
31
28
31
30
Revenue Calc.
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
(Ivc Amt - (A + B)) x 1 / 11
B) Ivc Amt x 9 / 365
Revenue recognized in first period: 12,000 USD x (16/365) = 526.03.
Revenue recognized in last period: 12,000 USD x (14 / 365) = 460.27.
Remainder to be divided evenly: 12,000 USD - (A + B) = 11,013.70.
Number of periods used to divide the remainder revenue: 13 - 2 = 11.
Revenue recognized in period 2 through 12: C / D = 11,013.70 / 11 = 1001.25.
Rounding difference: 12,000 - (526.03 + 460.27 + (1001.25 x 11)) = -.05.
Rounding difference applied to the partial periods: 460.27 -.05 = 460.22.
Note: If you use this proration method, the BI_ACCT_ENTRY monthly values will not be identical to the original bill when you create credits in a month different than the original invoice.
Method 5: User-Defined Proration
Define the user-defined proration method to meet your specific business needs.
Field or Control |
Description |
|---|---|
Revenue Days |
The days in an accounting period during which revenue is recognizable. For example, you have a service contract that ranges from January 1, 2003 through February 15, 2003 with contract liability distribution based on a monthly detail calendar. The number of days in the accounting period for February 2003 is 28, and the number of revenue days is 15. |
Fully Recognizable Period |
An accounting period in which the number of revenue days equals the number of days that are in the period. |
Partially Recognizable Period |
An accounting period in which the number of revenue days is less than the number of days that are in the period. |
Mid-period Day |
The day in an accounting period that determines whether the accounting period is fully recognizable or not recognizable at all. The midperiod day applies only when calculating contract liability by method 3 (spread evenly using a midperiod rule.) You can specify the midperiod day, or you can enable the system to assign the date. The system defines the midperiod day by dividing the number of days in the accounting period by two and rounding to the nearest whole number. |
Remainder Revenue |
The amount of revenue remaining after revenue that is assigned to a partially recognizable period is subtracted from the total revenue amount. Remainder value applies only when you calculate the contract liability by method 4: spread partial periods by days with the remainder spread evenly. |