Understanding Journal Entries
Overview
Journal entries record your business transactions in RevRec, which can be summarized and transferred to your accounting systems. RevRec uses your revenue and expense-related accounts mapped to your General Ledger (GL) system, making it easy to post these entries either manually or automatically.
Sample Journal Entries
Let's look at an example to understand how the entries are created in RevRec.
Widget Inc. sells an annual subscription X for $12,000 to "widget builder" and pays their star salesman Revy a commission of $600 upfront. The commission is determined to be capitalizable under Widget Inc.'s accounting policy. The invoicing system is set up to automatically establish an Accounts Receivable (A/R) balance and recognize revenue for the same amount.
The following sections explain how journal entries are captured in RevRec for the corresponding revenue and expense transactions.
Day 1 Deferred Revenue Entry
The entire earned amount of $12,000 gets established as revenue on day 1, but is recognized as deferred since the product or service is yet to be delivered and is considered a liability to Widget Inc. RevRec automatically generates the following entry:
Day 1 Deferred Expense Entry
The $600 cost incurred for sales commission is fully incurred and will be amortized over the contract term (two years). A deferred expense entry for this amount is established along with an expense clearing entry for the adjustment.
Day 2 Revenue Entry
Subsequent to establishing the deferred revenue balance, when the first-month passes and Widget Inc. earns the actual revenue for the service delivered for a month, RevRec determines the amount of revenue to be recognized. An entry is added to deduct the total liability by the month's delivery along with another entry that is added for the month's revenue, as follows:
Day 2 Expense Amortization Entry
Subsequently, the commission is amortized over the contract term. Therefore, $25 is expensed every month for the next 24 months with entries as follows:
Note
Your Day 1 entry may vary depending on how your invoicing or commission systems produce entries. For example, if your invoicing system already establishes the deferred revenue balance, you can turn off RevRec's Deferred Revenue journal entries by not setting up the GL account and mapping for the "Deferred Revenue" account type.
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