About Revenue Recognition for Agreements
The revenue recognition process allows you to recognize deferred revenue based on a defined deferral schedule and billed-to-date amounts.
When you recognize revenue for agreements and/or periodic services (in the SM Revenue Recognition form), the system moves the recognized amounts from the appropriate Deferred Revenue accounts to the appropriate Revenue accounts.
If you are distributing revenue to multiple departments (that is, you selected the Post Revenue to Service Center Department checkbox for applicable periodic services on the agreement), the system posts revenue as follows:
- Agreement revenue is posted to the department specified for the Agreement Type associated with the agreement.
- Service revenue is posted to the department specified for the service center associated with each applicable service (in SM Service).
For agreement services billed separately, the system determines the amount to recognize based on the deferral schedule for the agreement service, less amounts already recognized. It then moves that amount from the Deferred Rev account to the specified department's Revenue account.
For agreement services included in the agreement billing, the system determines the amount to recognize based on the agreement's deferral schedule, less previously recognized amounts. It then distributes the amount proportionately to each specified Revenue account.
The total billable amount for an agreement is $25,000, which includes the agreement price of $21,500, one periodic service for $2000, and one periodic service for $1500. The percentages for revenue distribution are calculated as follows:
Agreement: 21,500 / 25,000 = .86 (86%)
Service 1: 2000 / 25,000 = .08 (8%)
Service 2: 1500 / 25,000 = .06 (6%)
When recognizing revenue, these percentages are applied to determine the amount moved from the Deferred Rev accounts to the Revenue accounts. For our example, we will assume a recognized revenue amount of $5000. In this case, the amount would be distributed to the applicable Revenue accounts as follows:
| Department | Revenue Account | Amount Distributed | Calculation | |
|---|---|---|---|---|
| Agreement | A | 10000. | $4,300 | 5,000 x .86 = 4,300.00 |
| Service 1 | B | 11000. | $400 | 5,000 x .08 = 400.00 |
| Service 2 | C | 12000. | $300 | 5,000 x .06 = 300.00 |
The system allows you to recognize revenue even if you have not created a billing for the agreement or agreement service, as long as the deferral dates fall on or before the recognition date. However, recognizing revenue before any billing occurs may cause the deferral revenue account (defined by department in SM Departments) to have a negative balance until you create and process the applicable billings.
