Contract accounting flow

Sage Intacct's Contracts application has the flexibility to allow you to recognize revenue when you want, according to your business process. In a given revenue period, some companies might invoice first and then recognize revenue, other companies might recognize revenue first and then invoice. Additionally, receiving a payment can occur at any point in the contract accounting workflow.

A typical revenue recognition accounting process uses three accounts: Accounts Receivable, Deferred Revenue, and Sales Revenue. In order to cover all possible event timing scenarios, Contracts uses eight accounts in three categories: Unbilled, Billed, and Paid

Unbilled Billed Paid
Accounts Receivable Accounts Receivable <Cash>*
Deferred Revenue Deferred Revenue Deferred Revenue
Sales Revenue Sales Revenue Sales Revenue

* Although part of the revenue recognition process, the Cash account is not specific to Contracts.

In order to be ASC 606 compliant, companies are required to disclose the state of contracts (or category of contract) as having either recognized revenue greater than cash collected (contract asset), or recognized revenue less than cash collected (contract liability). Contracts is designed so your financial statements can potentially separate out each line item of each contract into the various GL accounts when revenue is in a particular state.

Unbilled Deferred Revenue acts as a contra account to Unbilled AR in the asset section of the balance sheet so that the unbilled accounts have no effect on the balance sheet until Unbilled Sales Revenue is recognized. That event reduces Unbilled Deferred Revenue, so Unbilled AR only appears on the balance sheet when Unbilled Sales Revenue is posted. This correctly shows unbilled AR only when unbilled revenue is recognized.

When payment is received prior to revenue recognition, the amounts may need to be recorded as a contract liability. You can analyze the status of Paid Deferred Revenue, Paid Sales Revenue accounts, and Unbilled Sales Revenue and Unbilled will show the net contract asset/liability positions.

The Billed AR, Billed Deferred Revenue, and Billed Sales Revenue accounts are for amounts that are neither unbilled nor paid.

Data flows between these accounts based on posting events, which are:

  • On create: the GL entry is posted when the contract line is first posted. This constitutes the contract booking.
  • On recognition: the GL entry is posted when revenue is posted for the contract line.
  • On invoice: the GL entry is posted when the contract line is invoiced.
  • On payment: the GL entry is posted when payment is applied to the invoice containing the contract line.
  • On MEA: the GL entry is posted when the MEA allocation is created. This is only applicable to Advanced Contract Revenue Recognition.

When an event occurs, the system automatically reclassifies entries where applicable to move them to the appropriate type of account (Accounts Receivable, Deferred Revenue, Sales Revenue) for the applicable condition (Unbilled, Billed, or Paid). If you are using dual-book reporting, the events will post twice—once in each revenue recognition journal.

The following examples show how the data flows between accounts according to the timing of the event.

Example 1 - Invoice before revenue recognition

In this example, there is a contract line for R1,200 with a twelve-month term. The invoices occur quarterly, with the first invoice at the beginning of the contract. Revenue is recognized monthly via the straight line method.

Month Event Unbilled AR Billed AR Paid AR/Cash Unbilled Deferred Billed Deferred Paid Deferred Unbilled Sales Billed Sales Paid Sales
March Save (Book) the contract line Debit 1200     Credit 1200          
April Generate Invoice for the 1st quarter   Debit 300     Credit 300        
  (System reverses Unbilled) Credit 300     Debit 300          
April Post one month of revenue         Debit 100     Credit 100  
May Receive payment   Credit 300 Debit 300            
  (System posts to Paid accounts)           Credit 200     Credit 100
  (System reverses Billed revenue recognition)         Debit 200     Debit 100  
May Post one month of revenue           Debit 100     Credit 100
  Balance 900 0 300 900 0 100   0 200

Example 2 - Revenue recognition before invoice

In this example, there is a contract line for R1,200 with a twelve-month term. The invoices occur quarterly, with the first invoice at the end of the first quarter of the contract. Revenue is recognized monthly via the straight line method.

Month Event Unbilled AR Billed AR Paid AR/Cash Unbilled Deferred Billed Deferred Paid Deferred Unbilled Sales Billed Sales Paid Sales
March Save (Book) the contract line Debit 1200     Credit 1200          
April Post one month of revenue       Debit 100     Credit 100    
May Post one month of revenue       Debit 100     Credit 100    
June Post one month of revenue       Debit 100     Credit 100    
July Generate invoice for the 1st quarter   Debit 300     Credit 300        
  (System reverses Unbilled) Credit 300           Debit 300    
  (System recognizes in Billed)         Debit 300     Credit 300  
July Receive payment   Credit 300           Debit 300  
  (System posts to Paid accounts)     Debit 300           Credit 300
  Balance 900 0 300 900 0   0 0 300

Example 3 - Revenue recognition with MEA

In this example, there is a contract line for R1,200 with a twelve-month term. The invoices occur quarterly, with the first invoice at the beginning of the contract. Revenue is recognized monthly via the straight line method.

When the contract starts in March, this contract line participates in an MEA allocation with one other contract line, which results in additional revenue for this contract line. In May, an add on to the contract requires a second MEA allocation that takes away revenue from the contract line. Example amounts are rounded to simplify the display.

Month Event Unbilled AR Billed AR Paid AR/Cash Unbilled Deferred Billed Deferred Paid Deferred Unbilled Sales Billed Sales Paid Sales
March Save (Book) the contract line Debit 1200     Credit 1200          
March Create MEA allocation Debit 267     Credit 267          
March Generate Invoice for the 1st quarter   Debit 300     Credit 300        
  (System reverses Unbilled) Credit 300     Debit 300          
March Post one month of revenue         Debit 122     Credit 122  
April Post one month of revenue         Debit 122     Credit 122  
May Create 2nd MEA allocation Credit 53     Debit 53          
  (System reverses 1st allocation) Credit 267     Debit 267          
May Receive payment   Credit 300 Debit 300            
  (System posts to Paid Deferred Revenue)         Debit 56 Credit 56      
  (System posts to Paid Sales Revenue)               Debit 244 Credit 244
May

Post one month of revenue

(MEA amount=95) + (one-time adjustment amount= -53)

           Debit 42     Credit 42
  Balance 847 0 300 847 0 14 0 0 286

Where to see contract posting events

You can view the transaction history for a contract or contract line via the Transaction History tab.

Transaction history tab page.

When accessed from the contract, the Transaction history tab displays the entire debit/credit history for the contract for each journal. When accessed from the contract line, this tab displays the debit/credit history for just the selected contract line. To view transaction history as of a certain date, enter a date in the As of date field and select Refresh.

There are two journal entries associated with each line/event combination. Auditors can use this information to verify the reclassification of Deferred Revenue, Sales Revenue, Accounts Receivable, and Expense GL entries.

Learn more about the Transaction history tab.

Where to see account balances

You can view the current Unbilled, Billed and Paid balances for your Accounts Receivable, Deferred Revenue, and Sales Revenue accounts in the Journal balances tab. You can access this tab from the contract or contract line.

The Journal balances tab showing different balances for different accounts.

The Journal Balances tab shows the balances for both revenue recognition journals. To view a GL report that shows a breakdown of an amount by each account, select the link in a desired column. From the report, you can drill-down to a specific journal entry.

Learn more about the Journal balances tab.