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:
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An invoice is imported for $750.
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The invoice has 3 lines:
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Line 1 is $200
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Line 2 is $450
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Line 3 is $100
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The invoice has 2 revenue contingencies:
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Line 1 is associated with a nonstandard 90-day refund policy.
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Line 3 is associated with a 120-day cancellation provision.
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Invoice Accounting Used for Credit Memos profile option = Yes.
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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:
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$80 to Line 1.
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$180 to Line 2.
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$40 to Line 3.
The result of these applications is as follows:
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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.
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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:
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$27 to Line 1.
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$60 to Line 2.
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$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.