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.
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.
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:
The $600 cost incurred for sales commission is fully incurred and will be amortized over the lifetime of the contract(two years). A deferred expense entry for this amount is established along with an expense clearing entry for the adjustment.
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:
Subsequently, amortization of the commission is computed over the estimated customer life as per the contract. Therefore, $25 gets expensed every month for the next 24 months with entries as follows:
Note that your Day 1 entry might vary depending on how the 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.