Example 4 - Revenue Recognition and Invoicing with Reconciliation

Many companies do not want a variance between invoice and recognized revenue amounts. In this case, the revenue and receivable amounts are accrued estimates. The actual revenue and receivable amounts always equal the invoiced amounts. When the company processes invoices, all the estimates are reconciled.

For example, if the company recognizes revenue monthly, but generates invoices only after the work is completed, the estimated revenue and receivable amounts are reconciled when the actual revenue and receivable amounts for the invoice are processed.

When you process invoices with revenue reconciliation, the journal generation control is 4 (revenue recognition and invoicing, which requires revenue reconciliation).

When you process revenue recognition, this information is true:

• Invoicing does not apply when you process revenue recognition at the end of each month.

• The system calculates the same amount for accrued revenue and accrued accounts receivable.

• The system calculates the amounts for accrued revenue and accrued accounts receivable simultaneously.

• The system uses these table types for the billing AAI table to create the journal entries:

  • Billing AAI table number 4811 directs the system to the base rules for actual revenue.

  • Billing AAI table number 4832 directs the system to the base rules for accrued accounts receivable.

When the work is complete at a later time, and you process invoices, this information is true:

• The system calculates the same amount for accrued accounts receivable and accounts receivable.

• The system calculates the amounts for accrued accounts receivable and accounts receivable simultaneously.

• The RC AAI designates the A/R account.

• The system uses the billing AAI rules and AAIs to create the journal entries.

  Billing AAI table number 4832 directs the system to the base rules for accrued accounts receivable and the RC AAI to the account information for accounts receivable.

The system also:

• Processes the revenue reconciliation journal entries.

• Reconciles the accrued revenue and receivable amounts.

• Creates the actual invoice amounts.

• Uses these table types for the billing AAI rules to create journal entries:

  • 4811 to reconcile the actual revenue amounts.

  • 4831 to credit the accrued revenue amount.

  • 4832 to reconcile the accrued accounts receivable amounts.

For example, suppose that your company began a project on June 15 and completed the project 30 days later. The total cost for the project was 1,000.00. Every week the company generates the workfile transactions with a 15 percent markup that is added to the cost. Your company processes revenue recognition at the end of each month, beginning in June. It processes the invoice on July 25.

The system creates these journal entries for the project costs:

G/L Date	Account	Debit	Credit
June 25, 2005	Project Cost	350.00
June 25, 2005	Accounts Payable		(350.00)
July 25, 2005	Project Cost	650.00
July 25, 2005	Accounts Payable		(650.00)

The Project Costs account postings and balances in the general ledger are:

Date	Debit	Credit	Balance
June 25, 2005	350.00		350.00
July 25, 2005	650.00		1,000.00