Oracle Revenue Recognition

By

In Revenue Recognition we have two concepts in oracle apps.

1. Invoicing Rule.
2. Accounting Rule.
Invoicing Rule-
Invoice rules will be determined the accounting period in which receivables are recognized.
There are 2 types of Invoice Rules:
1. Bills in advance
2. Bills in Arrears


Bills in advance- System will recognize the invoice amount as an advance or starting of a project. In case of Bill in advance “Unearned Revenue " will come into the picture.


If you enter an invoice with a Bill in Advance invoicing rule, Receivables creates the following journal entries.
In first Period:
Receivables A/c .....Dr
To Unearned Revenue A/c......Cr
To Tax A/c ...........................Cr
To Freight A/c.......................Cr
In all periods of the rule for the portion that is recognized:
Unearned Revenue A/c ......Dr
To Revenue...........Cr


Bills in Arrears- System will recognize amount at the end of the contract or project. In case of Bills in Arrears “Unbilled Receivable" will come into the picture. If you enter an invoice with a Bill in Arrears invoicing rule, Receivables creates the following journal entry:


In first Period, Second period till the last period the following entry will be generated.
Unbilled Receivable A/c.......DR
To Revenue ..............CR
At the completion of Project and at the last Period the following entry will be generated by system.
Receivables A/c..............DR
To Unbilled Receivables A/c.............CR
To Tax.........................................CR
To Freight...................................CR


Accounting Rules:
Accounting Rules will determined the Accounting Period in which Revenues are recognized.
There are 2 types of accounting rules:
1. Fixed Schedule
2. Variable Schedule


Fixed Schedule: We will define duration of the project and % of Revenue of each accounting period, at the time of fixed scheduled accounting rule setup.

Variable Schedule: At the time of set up the Variable Schedule Rule we will not enter duration of the project & % of Revenue for each accounting period.

We enter only first period Revenue % at the time of accounting rule set up. Duration of the project will be entered at the time of invoice entry.

Revenue Recognition principle is one of the important principles of Accrual Accounting. According to this principle, revenue must be recognized when

1. They are realized or realizable and

2. They are earned

 

Revenue is realized when products are exchanged for cash or claims to cash (Receivable).

Revenue is realizable when related assets received are readily convertible to cash or claims to cash.

Revenue is earned when the products are delivered or services are performed.

Recognizing the revenue means recording the amount as revenue in the financial statements.

Realization is the process of converting non-cash resources into cash.

In the Revenue Recognition principle, it does not matter when cash is received. (In Cash Basis Accounting, revenue is recognized when cash is received no matter when goods or services are sold).

For revenue to be recognized, both the above conditions must be met. In other words for revenue to be recognized, final delivery must be completed (of goods or services) and there has to be a payment assurance.

 

Let us have a look at the timing of Revenue Recognition

1) For sale of finished goods (Inventory Items), revenue is recognized at the date of sale (some interpret this as the date of shipping or the date of delivery)

2) For sale of services (e.g. support services), revenue is recognized when the services are performed (delivered)

3) For sale of Asset Items (other than inventory items like finished goods), revenue is recognized at the point of sale (i.e. when the customer is invoiced)

4) For revenue from other activities like rent for using company’s Fixed Assets, revenue is recognized as time passes or as assets are used.

 

Examples:

 

1) If a company invoices its customer for 100 units of item ‘A’, and ships (delivers) only 25 units, the company cannot recognize revenue for entire 100 items. It can only recognize revenue equivalent to the number of units delivered (Revenue is earned only when the products are delivered). Similarly, let’s say you pay $120 in advance to company ‘ABC’ for magazine subscription for one full year. The fact that company ‘ABC’ received money for one full year does not mean that they can record the entire amount as Revenue. In-fact the amount received in advance is a Liability to the company because they have to deliver magazines to their customer every month and if they fail to do so, they are liable to refund the amount received in advance. In this scenario, the company will recognize 1/12th of the entire amount every month as earned revenue after they deliver the magazine.

 

2) Company ‘ZXC’ signs a 3 year support contract with its client for a total amount of 3 million. This amount cannot be recorded as revenue unless the Company provides the support services to the client. Assuming the company is following a monthly calendar accounting period, the company will recognize 1/36th of the entire support contract deal amount every month. (Revenue is recognized when services are performed)

 

There are few exceptions to the timing of revenue recognition for sale of inventory items. Under normal scenario, revenue is recognizes at the point of sale, however if there are return policies, and if the company cannot reasonably estimate the amount of future returns, the revenue should be recognized only after the expiration of the return policy period.

Revenue Recognition Accounting:

If revenue is not recognized immediately, what is the accounting entry for the Sales Invoice? Let’s have a look

Let’s say, you invoice the Customer in Advance for the annual support contract of $12000. Since, you are invoicing the customer in Advance, you debit your Receivables. But then if you are not crediting the revenue right away, where do you account for the credit side of the accounting entry? You credit, what is called as Deferred Revenue (or Unearned Revenue). Deferred Revenue is actually a liability for the company. (The company is liable to provide the goods or services for which cash is received or will be received in advance). As and when the goods or services are delivered, the Deferred Revenue is reduced (debited) and revenue is recognized.

 Accounting when the Invoice is created in Jan

Date

Accounting Class

Debit

Credit

Comments

1-Jan

Receivables

12000

The entire receivables is recognized in advance. How this receivable is collected will depend on the payment terms of the Invoice

1-Jan

Deferred Revenue

12000

 

End of Jan, Revenue is recognized for 1/12th of the entire amount, because the company has provided one month’s service to its client. To that effect, Deferred Revenue will be reduced and revenue will be recognized

Date

Accounting Class

Debit

Credit

Comments

31-Jan

Deferred Revenue

1000

Deferred Revenue reduced

31-Jan

Earned Revenue

1000

Earned Revenue amount for one month

 

End of Feb, another months revenue is recognized

Date

Accounting Class

Debit

Credit

Comments

28-Feb

Deferred Revenue

1000

Deferred Revenue reduced

28-Feb

Earned Revenue

1000

Earned Revenue amount for one month

 

The company will have similar accounting entry each month till Dec. At the end of Dec, the Deferred Revenue will be Zero and the entire amount will be reported as Revenue earned.

 

-       Sukesh


Comments

Post a Comment

Popular posts from this blog

Oracle ERP - Year End Closing Journals

By
  Many organizations follow specific procedures to generate special journal entries to close and open fiscal years. These closing entries apply to both the income statement and balance sheet. Auditable closing procedures vary considerably, depending on country reporting requirements, generally accepted accounting practices in a country, and organization business needs. General Ledger is equipped to create actual closing journals for year-end and other closing periods. If your organization has multiple legal entities, you can create closing journals for multiple ledgers simultaneously with ledger sets. You also have added security through data access sets because you can only run the closing journals programs against ledgers you have full read and write access to through your data access set. To process year-end closing journals, we recommend you: Set up the last day of your fiscal year as an adjusting period. Set up the first day of your new fiscal year as an adjusting period...
Read more

Oracle Fusion Financials Period End Close Process and Dependencies

By
Image
Oracle ERP Cloud customers have a need to close their books every period, quarter and/or year. This article provides guidance on the period-end close procedures for Oracle Cloud Application modules, across Financials, Procurement, Projects, Inventory, and Payroll. It provides an overview of the relative timing of these procedures across the various modules. The steps included in this article are intended to be generic and do not relate to a specific organization. You may have additional steps that pertain to your specific organization, industry, or geography, so you can choose to extract the steps from this article that pertain to your organization and customize it by adding additional reports or procedures. Although this document refers to “Period Close Procedures”, many of the processes can be performed regularly throughout the accounting period as required. Each subledger application provides control as to when and how frequently data is transferred from the subledger applicatio...
Read more

Oracle Cloud - Year End Process

By
Many countries follow specific procedures to generate journal entries to close and open fiscal years. These year-end entries apply to both the income statement and balance sheet accounts. Auditable closing procedures vary based on country's reporting requirements and an organization's business needs. Oracle Fusion General Ledger provides two processes for the year-end closing journals. These processes close the accounts by putting the sum of the debits in the credit and vice versa. For many European countries the accounts must be closed by recording the difference between the total debits and total credits. Optionally run one or both of these closing processes to create one of two types of closing journals that move forward year-end and other closing period-end balances. Create Income Statement Closing Journals: Posts all of the income statement account balances to one or more retained earnings accounts. Create Balance Sheet Closing Journals: Posts all asset, liability, an...
Read more

Oracle Financial Cloud New Feature

By
Image
Learn how to configure dependencies between chart of accounts segments using  related value sets   Introduction: A related value set is an Independent type value set whose values are related to another Independent type value set. Use this feature to automatically display a list of related values in a segment value choice list, based on what value was selected in a preceding segment in your chart of accounts.   For example, if you have Company and Division segments in your chart of accounts, and the company US East has transactions in only the Car and Truck divisions, while the company US West deals with only the Motorcycle and Car divisions, you can define relationships between the Company and Division segments to enforce the relationships between their segment values.   The order of the segments in a chart of accounts impacts the behavior of related value sets. For example, if the value of the Company segment determines the valid values for the Division ...
Read more

Oracle Procurement Interview Questions

By
1.What exactly do you know about Procure to pay? Ans:   Well, it is an approach which is commonly called as P2P. Basically, it is the process of fulfilling the need for raw material which is required to accomplish manufacturing and other important tasks within an organization simply. The payment making of the raw material is also included in this. One of the best things about this cycle is it easily enables them to manage their cash flow without facing major issues.   2 . What is a Purchase Requisition and define various requisitions? Ans:  It is a formal request intended to procure/buy something that is needed by the organization. It is created and approved by the department requiring the goods and services. A purchase requisition typically contains the description and quantity of the goods or services to be purchased, a required delivery date, account number and the amount of money that the purchasing department is authorized to spend for the goods or ...
Read more