Scope
What are the default General Ledger accounts in RevRec?
What are the default Expense Deferral & Recognition accounts in RevRec?
Solution
General Ledger Accounts
New default GL accounts are set up for a contract and other cost recognition with the following account types:
| Account Number | Account Name | Account Type |
|---|---|---|
| 6000 | Expense Clearing (EC) | Expense Clearing |
| 1000 | Deferred Expense (DE) | Deferred Expense |
| 5000 | Expense Recognized (ER) | Expense Recognized |
Expense Deferral & Recognition
Whenever a Contract Cost or Other Cost is added, RevRec books the following entry and establishes a deferred cost:
| Account | Debit | Credit |
|---|---|---|
| Deferred Expense | XXX | |
| Expense Clearing | XXX |
If the Amortization method is selected as “Point in Time”, then RevRec recognizes the entire amount in the current period. If the amortization method is “Ratable” then RevRec capitalizes the cost over the life of the asset and amortizes it for each period. RevRec books the following entry to recognize the expense:
| Account | Debit | Credit |
|---|---|---|
| Expense Recognised | XXX | |
| Deferred Expense | XXX |
General Ledger Account Mapping
RevRec’s expense recognition feature comes equipped with the default GL mapping – one account for each account type. For example, a single deferred expense and expense amortization account for the company.
RevRec also allows you to edit the mapping based on your accounting system accounts. For more complex setups you can use other fields such as Product Type, department, class, location, or a different custom field to map entries to specific accounts, similar to revenue.
Journal Posting
Journal entries for expense-related transactions can either be posted manually or directly to an integrated third-party accounting system, provided that you have integrated one with RevRec. Ensure that the account names are consistent between the accounting system and RevRec.
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. The 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 reallocated.
Sale Order:
Expense:
Accounting Rule:
For Revenue
For Cost
Calculation:
The 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 a 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, a $1,200 expense is provided against product A, and the reallocation of expense is false within the rule.
Since expense follows revenue is true in the rule. The 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 the 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 |
The 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 Costs:
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.Related Article and Documentation