Examples of Accounting for Credit Memos Against Invoices with Revenue Contingencies

These examples illustrate the accounting for partial credit memos against an invoice with revenue contingencies.

The details of the invoice setup are:

• An invoice is imported for $750.

• The invoice has 3 lines:

  • Line 1 is $200

  • Line 2 is $450

  • Line 3 is $100

• The invoice has 2 revenue contingencies:

  • Line 1 is associated with a nonstandard 90-day refund policy.

  • Line 3 is associated with a 120-day cancellation provision.

• Invoice Accounting Used for Credit Memos profile option = Yes.

• Customer has extended payment terms.

First Transaction

This table shows the initial accounting entry:

Account	Debit	Credit
Accounts Receivable	750.00	None
Unearned Revenue	None	750.00

Second Transaction

You apply a $300 receipt against the invoice, 45 days after the invoice date.

Based on the weighted average formula, Receivables applies:

• $80 to Line 1.

• $180 to Line 2.

• $40 to Line 3.

The result of these applications is as follows:

• Receivables can't recognize revenue for Line 1 or Line 3 due to the related contingencies. Receivables records payments to Line 1 and Line 3 as amounts that are pending revenue recognition at a later date.

• Receivables can only recognize revenue for Line 2.

This table describes the accounting entry:

Account	Debit	Credit
Cash	300.00	None
Accounts Receivable	None	300.00
Unearned Revenue	180.00	None
Earned Revenue	None	180.00

The total amount due on this invoice is now $450. The unearned revenue amount on this invoice is $570.

Third Transaction

You apply a credit memo for $200 against this invoice.

Because this invoice has a combination of payment-based and time-based contingencies, the balance of the credit memo isn't prorated between the unearned revenue and revenue accounts. Instead, Receivables credits the receivables account and debits the unearned revenue account for the full amount of the credit memo.

This table describes the accounting entry:

Account	Debit	Credit
Unearned Revenue	200.00	None
Accounts Receivable	None	200.00

The total amount due on this invoice is now $250. The unearned revenue amount on this invoice is $370.

Fourth Transaction

After 90 days pass, the refund policy expires. Receivables initiates revenue recognition for the amount of the receipt that you previously applied to Line 1.

This table describes the accounting entry:

Account	Debit	Credit
Unearned Revenue	80.00	None
Accounts Receivable	None	80.00

The total amount due on this invoice is still $250. However, the unearned revenue amount on this invoice is $290.

Fifth Transaction

You apply a credit memo for $150 against this invoice.

Because the invoice still has a combination of payment-based and time-based contingencies against it, Receivables credits the receivables account and debits the unearned revenue account for the full amount of the credit memo.

This table describes the accounting entry:

Account	Debit	Credit
Unearned Revenue	150.00	None
Accounts Receivable	None	150.00

The total amount due on this invoice is now $100. The unearned revenue amount on this invoice is $140.

Sixth Transaction

After 120 days pass, the cancellation policy expires. Receivables initiates revenue recognition for the amount of the receipt that you previously applied to Line 3.

This table describes the accounting entry:

Account	Debit	Credit
Unearned Revenue	40.00	None
Earned Revenue	None	40.00

The total amount due on this invoice is still $100. The unearned revenue amount on this invoice is $100.

Seventh Transaction

You apply a $100 receipt against the invoice.

Based on the weighted average formula, Receivables applies:

• $27 to Line 1.

• $60 to Line 2.

• $13 to Line 3.

At this point, all time-based contingencies have expired.

This table describes the accounting entry:

Account	Debit	Credit
Cash	100.00	None
Accounts Receivable	None	100.00
Unearned Revenue	100.00	None
Earned Revenue	None	100.00

The invoice is now fully paid and no unearned revenue remains.