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Contract accounting, billing, unbilled, deferred revenue, ar aged

Contract AccountingContract is $500k on 1/1/14 Billed $250k on 1/10/14 reccognized revenue of $100k on 1/31/14 Do we set at contract signing date of 1/1/14 the following: Debit Unbilled Revenue $500k Credit deferred revenue ($500k) On 1/10/14 record invoice into AR AGED: Debit AR AGED $250k Credit Unbilled revenue ($250k) On 1/31/14 recognize revenue: Debit Deferred revenue $100k Credit Revenue ($100k) I guess my question is it GAAP to book signed contract in full at contract signing to set up a debit and credit on balance sheet?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Nope. Your deferred revenue is $250 (dropping to $150K), not $500. Deferred revenue gets credited against cash or AR. "Unbilled Revenue" isn't a GAAP concept in the way positioned here. Typically we call this "booked not billed" and is part of the managerial accounting (aka Finance report) package, but is excluded from the accounting & GL entirely.

Joshua Lee
Title: Self
Company: Self
(Self, Self) |

How does deferred revenue get credited against AR? I guess I always associated AR with revenue and not with deferred revenue. Am I wrong? If you had a situation where you were going to credit Deferred Revenue and debit AR, shouldn't you just exclude that from the GL? Isn't that situation basically a promise to deliver some good/service in the future for some promise to get paid? That's just capitalizing contract value, no? Thanks!

Anonymous
(VP Finance) |

same facts but no billing has happened and all you do is recognize revenue of $100k for worked performed on 1/31/ but havent billed the client yet. Are you saying you would debit deferred revenue and credit revenue? This is where I have seen a debit to Unbilled revenue as an asset and a credit to revenue.

Topic Expert
Doug Thompson
Title: Director of Revenue
Company: Castlight Health
(Director of Revenue, Castlight Health) |

Keith is correct for the original scenario. While you can have unbilled revenue in certain circumstances, putting on both unbilled revenue and equal deferred revenue is grossing up the balance sheet which auditors do not like.

It is correct in certain cases to credit revenue and debit unbilled revenue (rather than deferred revenue). You would have to have a lot of history to justify this. One company I was with accrued unbilled revenue (and revenue) each month for Time and Materials professional services based on timecards, and then all the invoices were sent out a week later and recorded against A/R and unbilled revenue in the following month. But if the invoice is based on achievement of a milestone it would be far more difficult to justify doing that.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

If the amount billed at any point in time exceeds the amount recognizable as revenue, the difference is deferred revenue. If revenue exceeds billings, the difference is unbilled receivables. And for any one contract, you will only have one or the other - no grossing up of the balance sheet.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

I have to also ask, how are you recognizing revenue? Is it based on percentage of completion (based on estimated cost)? Assuming that revenue recognition is in order, Keith has this right. At January 31, the entries that would have accumulated.

Dr. A/R - $250
Cr. Revenue $100
Cr. Deferred Revenue $150

If you recognized more revenue than you billed, the unbilled revenue would be separate account and an asset vs. the deferred revenue liability. Simply put, don't combine or net these two accounts.

Anonymous
(VP Finance) |

Agreement with Patrick...Yes. That is exactly how I handled it. Thanks all for the feedback!

Anonymous
(Controller) |

Hello - Just to clarify, does this mean that a Deferred revenue balance would never be the full contract value but only based on the invoicing to the customer? If you have a annual contract billed quarterly then would your DR balance be for the full contract value or only the invoice value?

(Agent, JKS Solutions, Inc.) |

For the Best answer, you should contact to an accountancy firm and they can give you exact solution.

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