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.
Formula for expense recognition:
Contract Cost x Relative Ratio
$1,200 x ($12,000/$12,000)
$1,200 x 1.0000 = $1,200
Recognition for January will be $100.00 ($1200/12)
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.
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|
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:
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:
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.
Accounting Rule for Other Cost:
Expenses of $100 will be recognized from Jan-2020 to Dec-2020.
Note - You can customize the GL account mapping - for example, use different accounts for contract cost vs other costs.
Updated on: 05/07/2022