Straight-Line Revenue Recognition Examples in Advanced Revenue Management (Essentials)
Straight-line methods recognize the revenue from a sale in increments spread over the revenue recognition term. The term is based on the start and end dates and recognition method chosen. The start date and end date are included in the revenue recognition term. The revenue amount is the sales amount after discounts and allocation.
The examples that follow use the same start date, end date, and revenue amount:
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Revenue recognition start date: August 20
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Revenue recognition end date: December 19
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Revenue amount: $400
Straight-line, by even periods
This method divides the revenue amount evenly across all periods. Currency amounts are not prorated based on the number of days in any period.
|
Period |
Revenue |
|---|---|
|
August |
$80.00 |
|
September |
$80.00 |
|
October |
$80.00 |
|
November |
$80.00 |
|
December |
$80.00 |
|
Total |
$400.00 |
Straight-line, prorate first & last period (with rounding)
When using the Straight-line, prorate first & last period method, if rounding is required for amounts, then the rounding difference is added to the next to the last period.
This method recognizes revenue in equal amounts for periods other than the first and final periods, regardless of the number of days in those periods.
Amounts are prorated for the first period and the final period. Proration is based on the number of days in those periods divided by the number of days between the revenue recognition start and end dates.
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The first period is prorated for August 20 through August 31, inclusive. This is 12 days.
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The final period is prorated for December 1 through December 19, inclusive. This is 19 days.
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The periods between the first and last recognize the balance equally ($400 – $39.34 – $62.30 = $298.35 ÷ 3 = $99.45). However, the next to last period is rounded to $99.46.
|
Period |
Revenue |
Calculation |
|---|---|---|
|
August |
$39.34 |
12 ÷ 122 × $400 = $39.34 |
|
September |
$99.45 |
$298.36 ÷ 3 = $99.45 |
|
October |
$99.45 |
$298.36 ÷ 3 = $99.45 |
|
November (rounded) |
$99.46 |
$298.36 ÷ 3 + 0.01 = $99.46 |
|
December |
$62.30 |
19 ÷ 122 × $400 = $62.30 |
|
Total |
$400.00 |
|
Straight-line, using exact days
This method recognizes revenue amounts individually for each period based on the number of days in each period. Because each day in the term recognizes an equal amount, each period may recognize a different amount.
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The first period is prorated for August 20 through August 31, inclusive – 12 days.
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The second period is prorated for the entire month of September – 30 days.
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The third period is prorate for the entire month of October – 31 days.
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The fourth period is prorated for the entire month of November – 30 days.
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The last period is prorated for December 1 through December 19, inclusive – 19 days.
|
Period |
Revenue |
|---|---|
|
August |
$39.34 |
|
September |
$98.36 |
|
October |
$101.64 |
|
November |
$98.36 |
|
December |
$62.30 |
|
Total |
$400.00 |
Straight-line, prorate first & last period (period-rate)
This method first determines the total number of periods in the revenue recognition plan. Then it prorates the period amount allocated to the first and final periods based on the number of days in each of those periods. An even amount is allocated to all other periods.
For example, when recognizing $400 of revenue across the year from August 20 through December 19, the revenue allocation is calculated as follows:
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Calculate the total number of periods. If the start date is in mid-period and end day equals start day minus one, the first and final periods constitute one full period. This is the case with August 20 and December 19. This example has four periods.
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Calculate the amount for each period by taking the total amount ($400) and dividing by the number of periods (4).
$400 ÷ 4 = $100 per period
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Calculate the number of days in the first period, August 20 through August 31, inclusive. Divide the result (12) by the total number of days in the first and last periods (12 + 19 = 31). Then, multiply by the per period amount ($100).
12 ÷ 31 × $100 = $38.71
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Calculate the number of days in the final period, December 1 through December 19, inclusive. Divide the result (19) by the total number of days in the first and last periods. Then, multiply by the per period amount ($100).
19 ÷ 31 × $100 = $61.29
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The periods between the first and last each recognize $100.
|
Period |
Revenue |
Calculation |
|---|---|---|
|
August |
$38.71 |
12 ÷ 31 × $100 = $38.71 |
|
September |
$100.00 |
|
|
October |
$100.00 |
|
|
November |
$100.00 |
|
|
December |
$61.29 |
19 ÷ 31 × $100 = $61.29 |
|
Total |
$400.00 |
|
Straight-line, prorate first & last period vs. Straight-line, prorate first & last period (period-rate)
To show the differences between these two revenue recognition methods, the previous examples are shown side by side.
|
Period |
Straight-line, prorate first & last period |
Straight-line, prorate first & last period (period-rate) |
|---|---|---|
|
August |
$39.34 |
$38.71 |
|
September |
$99.45 |
$100.00 |
|
October |
$99.45 |
$100.00 |
|
November |
$99.46 |
$100.00 |
|
December |
$62.30 |
$61.29 |
|
Total |
$400.00 |
$400.00 |