Expense Examples

1: Expense Follows Revenue Plan

In this example, we have two products A1 and A2 within the sale order “SO1”. “New Commission” expense of $1200 is provided against product A1. Accounting Rule for “New Commission” defines this expense as “Contract Cost” and the expense will follow the revenue amortization plan of product A1, and not be re-allocated.

Sale Order:

Expense:

Accounting Rule:
For Revenue

For Cost

Calculation:
Formula for expense recognition:
Contract Cost x Relative Ratio

Product A1
$1,200 x ($12,000/$12,000)
$1,200 x 1.0000 = $1,200

Recognition for January will be $100.00 ($1200/12)

Details:
Contract Cost is the incremental cost associated with sale order.

The relative ratio is the ratio calculated by dividing the product sale price by the total sale price of the products in the sale order against which an expense is provided. In this example, $1,200 expense is provided against product A and reallocation of expense is false within the rule.

Since expense follows revenue is true in the rule. Amortization Term can be calculated by the date difference between Service Start and End Date for product A1 i.e., 12 Months (01/01/2020 – 01/01/2021).

An expense of $100 will be recognized every month for a year. This is equal to the $1200 allocated to Product A1.

Journal Entries

Account	Debit	Credit
Deferred Expense	$1200
Expense Clearing		$1200

Account	Debit	Credit
Expense Recognized	$100
Deferred Expense		$100

Continue ... If Reallocation of the expense across all items is marked True.

RevRec will allocate the expense of $1,200 between products. RevRec will calculate the allocation ratio using the product’s sales price and total contract value. The ratio for both products is 66:33.

Product Name	Total Expense	Allocated Expense
Product A1	$1,200	$800
Product A2	$0	$400

Recognition plan for product A will be based on $800 since it is following the revenue recognition rule. Recognition for January will be $66.67 ($800 / 12). Expenses will be recognized at the same rate for the rest of the life of the product.

Journal Entry for Product A1:

Account	Debit	Credit
Deferred Expense	$800
Expense Clearing		$800

Account	Debit	Credit
Expense Recognized	$66.67
Deferred Expense		$66.67

Product B has no rule assigned to it. RevRec auto-create functionality will create a rule with the Point in time method and recognize the $400 in January.

Journal Entry for Product A2:

Account	Debit	Credit
Deferred Expense	$400
Expense Clearing		$400

Account	Debit	Credit
Expense Recognized	$400
Deferred Expense		$400

2. Other Cost

In this example, we have a “website hosting cost” of $1,200. The Accounting Rule for “Indirect Expense 2” defines this expense as “Other Cost” with its recognition plan.

Expense:

Accounting Rule for Other Cost:

Recognition Plan
Expenses of $100 will be recognized from Jan-2020 to Dec-2020.

Journal Entry

Account	Debit	Credit
Deferred Expense	$1200
Expense Clearing		$1200

Account	Debit	Credit
Expense Recognized	$100
Deferred Expense		$100

Note - You can customize the GL account mapping - for example, use different accounts for contract cost vs other costs.

Updated on: 05/07/2022