Revenue Recognition

Recognizing the revenue means recording the amount as revenue in the financial statements. Revenue is realized when products are exchanged for cash or claims to cash (Receivable). Revenue is earned when the products are delivered or services are performed.

For revenue to be recognized, final delivery must be completed (of goods or services) and there has to be a payment assurance.

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, lets 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.

Invoicing and accounting rules

Invoicing and accounting rules let you create invoices that span several accounting periods. Accounting rule: Use accounting rules to determine revenue recognition schedules for your invoice lines. Invoicing Rule: Use invoicing rules to determine when to recognize your receivable for invoices

There are two types of invoicing rules, Bills in Advance: The bills in advance rule is used to recognize the receivables at the time when the bill is raised. It is an invoice created before the revenue is recognized. For example, if your company provides services and has to enter into a contract for the next three months, then you should recognize revenues in that particular month even though you may have received the payment when you started the service. The invoice raised is a bill in advance and revenue is recognized in the months ahead. For example, in April you raise an invoice of $1,500 for a three-month contract. The Accounting rule is three months fixed duration. The entries passed for this invoice are: In April, when the invoice is raised, Account Debit Receivable $ 1,500 Unearned When revenue is recognized for the April month, Account Debit Unearned $ 500 Revenue

Credit $1,500

Credit $ 500

In May, when the revenue is recognized, Account Debit Unearned $ 500 Revenue

Credit $ 500

In June, when revenue is recognized, Account Debit Unearned $ 500 Revenue

Credit $ 500

Bills in Arrears: You use the bill in arrears rule if you want to record the receivables at the end of the revenue recognition schedule. For example, for the invoice of $1,500 raised for a three-month contract, the accounting entries passed are:

In April, when the revenue is recognized, Account Debit Unbilled receivable $ 500 Revenue In May, when the revenue is recognized Account Debit Unbilled receivable $ 500 Revenue In June, when the revenue is recognized, Account Debit Unbilled receivable $ 500 Revenue Receivable $ 1,500 Unbilled receivable

Credit $ 500

Credit $ 500

Credit $ 500 $ 1,500

You need to run the revenue recognition program to generate the revenue distribution.

Accounting Rules:
We can setup as many rules as required to cover our various business scenarios involving how you want to recognize revenue. Below is the form used to do the Accounting Rules setup.

Following describes each of the fields in the above form: Name: Enter a unique and descriptive name for your Accounting Rule

Description: Enter text that describes this Accounting Rule Type: You have 4 options for Rule type Fixed Schedule (formerly Fixed Duration), this type prorates 100% evenly across the Number of Periods you specify Variable Schedule (formerly Variable Duration), this type allows you to later specify, during invoice data entry, the number of periods over which you want to recognize revenue. Daily Revenue Rate, All Periods, this type will use a daily revenue rate to calculate the precise amount of revenue for all periods whether it is full or partial. Use accounting rules of this type to meet strict revenue accounting standards which require accurate revenue recognition on a perday basis. Daily Revenue Rate = Total Revenue / Total Number of Days across all periods Daily Revenue Rate, Partial Periods, this type is a hybrid between Fixed Schedule and Daily Revenue Rate, All Periods. It will use a daily revenue rate to calculate the precise amount of revenue for the partial periods in the schedule, then prorate the revenue evenly across the full periods. Partial Period is when the invoice exists for only part of the period as opposed to all days within the period Period: This corresponds to the Period types you defined in Oracle General. Keep in mind that during data entry of the invoice lines, you can only use Accounting Rules that have the same Period as your Ledger. In addition to period types you've defined you can also pick Specific Date, which enables you to enter a specific date in the Date field in the Schedule section discussed below. Number of Periods: Enter the number of periods you want this accounting rule to recognize revenue across. Deferred Revenue: If you want to delay recognizing revenue, check this check box. When checked, invoices using this rule will have its revenue deferred to an unearned revenue account, and you must later use the Revenue Accounting Management (RAM) wizard to recognize the revenue. Invoices that use a Deferred Rule, will not appear in the Revenue Recognition Report, until Revenue is Scheduled via the Revenue Accounting process.

Schedule Section: Period: Specify the sequence of the Period starting with 1. Percent: Indicate the percent of the revenue you want to recognize in this period. Total Percent across all periods must equal 100% for Fixed Schedule types. For Variable Schedule types, you are allowed to define the percentage for the first period, which is typically less than 100%. Date: Enter a specific date, e.g. 10-JUN-2010, this field is only enabled if the Period you specified in the header section is Specific Date Notes: If you pick Type = Fixed Schedule, the Schedule section is automatically populated for you with as many rows as you specified in Number of Periods, and the percentage will be evenly spread across all periods to sum up to 100%. If you pick Type = Variable Schedule, you do not need to enter any details in the Schedule Section. However, if you want to recognize a specific percentage of revenue in the first period, you can enter Percent details for Period 1. The remaining percentage will be spread across the remaining periods you specify during transaction data entry Revenue recognition principle is an important accounting principle, which is the main difference between cash basis accounting and accrual basis accounting. In cash basis accounting revenues are simply recognized when cash is received no matter when and how the services were performed or goods delivered. In accrual basis accounting revenues are recognized when they are (1) realized or realizable and (2) earned no matter when cash is received. Invoicing Rules and Accounting Rules: NOTE: Both Invoicing Rules and Accounting Rules are attached to the header of the order In Oracle AR, the invoicing and accounting rules help create invoices that span several accounting periods. Accounting rules determine the accounting period or periods in which the revenue distributions for an invoice line are recorded. Invoicing rules determine the accounting period in which the receivable amount is recorded. Accounting Rules: Accounting rules determines revenue recognition schedules for invoice lines. Different accounting rules can be assigned to each invoice line. Using Accounting rules, the number of periods and the percentage of the total revenue to recognize in each period can be specified. Also accounting rules can be Fixed or Variable Duration. Clients can also create rules that will defer revenue to an unearned revenue account. This helps in the delay of specifying the revenue recognition schedule until the exact details are known. When these details are known, clients use the Actions wizard to recognize the revenue.

Creating Accounting Entries: Accounting distributions are created only after the Revenue Recognition program is run. For Bill in Advance, the offset account to accounts receivable is Unearned Revenue. For Bill in Arrears, the offset account to accounts receivable is Unbilled Receivables. Accounting distributions are created for all periods when Revenue Recognition is run. Running The Revenue Recognition Program: The Revenue Recognition program gives control over the creation of accounting entries. Submit the Revenue Recognition program manually through the Run Revenue Recognition window. The Revenue Recognition program will also be submitted when posting to Oracle GL. The program processes revenue by transaction, rather than by accounting period. Only new transactions are selected each time the process is run.