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What should I name an account for A/R that's not yet A/R?

Bryan Frey's Profile

Confusing, I know. The story is that my company books many service deals. Some are collectible before services have been rendered, some after. So the revenue recognition is separate from an order being collectible. Thus, we frequently end up with a sale that is entered in our acctg system which is a legit sales order, but not ready for billing, and the services have not yet been delivered. What do folks call the account that holds these balances? It's not A/R, because the service sold is not yet billable. Thanks.

Answers

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

If it is not yet billed, but you can recognize revenue, then credit Revenue and debit Unbilled Revenue.

If you cannot bill OR recognize revenue (which is the case if the services have not been delivered), it does not go on your financial statements. You can track sales backlog outside your accounting system.

Anonymous
(Corporate Controller) |

So you're saying that a sale would not go on the books unless it was already billable or revenue? If a binding sale is made for future delivery, does it simply not go on the company's books until billed or delivered?

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

You can book that sale as unearned revenue and make a second class of A/R.

As you recognize revenue, you would move it to revenue and "regular" A/R, or in the alternative, if the revenue for some reason can't be recognized, reverse it.

Elisha Daley
Title: Director of Financial Operations
Company: Crimson Hexagon
(Director of Financial Operations, Crimson Hexagon) |

We use an "Accounts Receivable - Unbilled" account for balances on a milestone schedule and the off-set is Deferred Revenue, once services have been completed, we invoice hitting A/R and the related revenue accounts

Matthew Horn
Title: VP Finance/Admin
Company: Modern Materials, Inc.
(VP Finance/Admin, Modern Materials, Inc.) |

I agree with Wayne. If I remember my accounting classes from college "Unearned Revenue" was the official term for collecting funds before services were rendered. A debit to your asset (cash) and a credit to the liability (Unearned Revenue) will accomplish this. Then a debit to lower Unearned Reveue and a credit to the actual Revenue account moves it once the services have been performed. My industry uses this very little, but I have had opportunity with one customer several years back where this was the case.

Topic Expert
Paul Benedetto
Title: CFO, Director of Finance, Consultant
Company: Nextwave Software, Rethink Fabrics
(CFO, Director of Finance, Consultant, Nextwave Software, Rethink Fabrics) |

Good suggestions here. There are 3 accounts you want to add to your system in order to provide better GAAP reporting (A/R-unbilled in assets, Deferred Revenue in liabilities and Revenue - unbilled on your P&L. I agree that you don't want to book your contracts when signed on your P&L and BS, as that will result in an unnecessary gross up of your statements, which auditors tend to frown upon. Work that has not begun should stay off your financials.

However, for many businesses that experience revenue recognition issues, it makes sense to record what is earned vs. unearned. This sometimes happens at the time of invoicing a client (say a prepayment situation) or maybe during your month end close, when you are assessing how much project milestone(s) have been achieved.

In addition to the revenue side, you might also want to accrue or defer expenses. This is especially true if there are upfront efforts in time and materials, but you can't necessarily bill your client until "x" or "y" happens.

The end result of accruing revenue and deferring expense is a more accurate representation of your client/project margin, and validation of your receivables.

I'm dealing with this now on a consulting engagement where a specialty manufacturer is recognizing revenue at time of invoice, not customer payment, then providing equipment at a later date. Cash vs. accrual and they have no idea what their true profit margin is - I am afraid they are selling projects at a loss...

Also important to have this unearned A/R vs. trade A/R broken out is that it can help you on your financing side. Not everyone will do it, but I have gotten banks to lend on the unearned component, especially if it is a recurring part of their business. Food for thought in getting your financials more aligned with GAAP.

Mark Sutherland
Title: CFO
Company: Profit By Design CFO & Controller Servic..
(CFO, Profit By Design CFO & Controller Services) |

With regard to your statement, "Some are collectible before services have been rendered, some after...". This sounds like a deposit to me. So you should probably credit "Unearned Revenue", and credit "Deposits Receivable" (or A/R-Unbilled as others are suggesting). When the customer pays the deposit, credit Deposit Receivable, debit cash. When you DO the work/provide the service/earn the revenue, move same from Unearned Revenue to Revenue/Sales on the P&L.

James Xu
Title: Cost Accountant
Company: Landmark
LinkedIn Profile
(Cost Accountant, Landmark) |

If partial or entire amount determined to be collectible before service rendered, that amount goes to Deposit or Unearned Revenue; If nothing collected upon sales/service agreement signed, no transaction goes on your bookes, simply track it in order entry or sales report.

Martin van Wunnik
Title: Experienced Financial Projects Manager
Company: ARSIMA Projects
LinkedIn Profile
(Experienced Financial Projects Manager, ARSIMA Projects) |

Bryan, Looking through your description and the different comments, it seems to me you are either describing a simple sales order situation. These do not hit the accounts "an sich" IMHO. Either, aren't we simply facing a standard "work-in-progress" situation, with milestones defining when and how to book the related revenue? Look at the construction world for sample bookings in such case.

S McDowell
Title: Controller
Company: SCI Electronics
LinkedIn Profile
(Controller, SCI Electronics) |

Only one party to the contract has submitted "consideration," thus the proper recording of any funds paid before earned is Dr Cash, Cr Unearned Revenue (a current liability acct).

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