Contract accounting flow

Sage Intacct's Contracts application has the flexibility to allow you to recognize revenue when you want, according to your business process. In a given revenue period, some companies might invoice first and then recognize revenue, other companies might recognize revenue first and then invoice. Additionally, receiving a payment can occur at any point in the contract accounting workflow.

A typical revenue recognition accounting process uses three accounts: Accounts Receivable, Deferred Revenue, and Sales Revenue. In order to cover all possible event timing scenarios, Contracts uses eight accounts in three categories: Unbilled, Billed, and Paid

Unbilled	Billed	Paid
Accounts Receivable	Accounts Receivable	<Cash>*
Deferred Revenue	Deferred Revenue	Deferred Revenue
Sales Revenue	Sales Revenue	Sales Revenue

* Although part of the revenue recognition process, the Cash account is not specific to Contracts.

Data flows between these accounts based on posting events, which are:

On create: the GL entry is posted when the contract line is first posted. This constitutes the contract booking.
On recognition: the GL entry is posted when revenue is posted for the contract line.
On invoice: the GL entry is posted when the contract line is invoiced.
On payment: the GL entry is posted when payment is applied to the invoice containing the contract line.
On MEA: the GL entry is posted when the MEA allocation is created. This is only applicable to Advanced Contract Revenue Recognition.

When an event occurs, the system automatically reclassifies entries where applicable to move them to the appropriate type of account (Accounts Receivable, Deferred Revenue, Sales Revenue) for the applicable condition (Unbilled, Billed, or Paid). If you are using dual-book reporting, the events will post twice—once in each revenue recognition journal.

The following examples show how the data flows between accounts according to the timing of the event.

Example 1 - Invoice before revenue recognition

In this example, there is a contract line for $1,200 with a twelve-month term. The invoices occur quarterly, with the first invoice at the beginning of the contract. Revenue is recognized monthly via the straight line method.

Month	Event	Unbilled AR	Billed AR	Paid AR/Cash	Unbilled Deferred	Billed Deferred	Paid Deferred	Billed Sales	Paid Sales
March	Save (Book) the contract line	Debit 1200			Credit 1200
April	Generate Invoice for the 1st quarter		Debit 300			Credit 300
	(System reverses Unbilled)	Credit 300			Debit 300
April	Post one month of revenue					Debit 100		Credit 100
May	Receive payment		Credit 300	Debit 300
	(System posts to Paid accounts)						Credit 200		Credit 100
	(System reverses Billed revenue recognition)					Debit 200		Debit 100
May	Post one month of revenue						Debit 100		Credit 100
	Balance	900	0	300	900	0	100	0	200

Example 2 - Revenue recognition before invoice

In this example, there is a contract line for $1,200 with a twelve-month term. The invoices occur quarterly, with the first invoice at the end of the first quarter of the contract. Revenue is recognized monthly via the straight line method.

Month	Event	Unbilled AR	Billed AR	Paid AR/Cash	Unbilled Deferred	Billed Deferred	Unbilled Sales	Billed Sales	Paid Sales
March	Save (Book) the contract line	Debit 1200			Credit 1200
April	Post one month of revenue				Debit 100		Credit 100
May	Post one month of revenue				Debit 100		Credit 100
June	Post one month of revenue				Debit 100		Credit 100
July	Generate invoice for the 1st quarter		Debit 300			Credit 300
	(System reverses Unbilled)	Credit 300					Debit 300
	(System recognizes in Billed)					Debit 300		Credit 300
July	Receive payment		Credit 300					Debit 300
	(System posts to Paid accounts)			Debit 300					Credit 300
	Balance	900	0	300	900	0	0	0	300

Example 3 - Revenue recognition with MEA

In this example, there is a contract line for $1,200 with a twelve-month term. The invoices occur quarterly, with the first invoice at the beginning of the contract. Revenue is recognized monthly via the straight line method.

When the contract starts in March, this contract line participates in an MEA allocation with one other contract line, which results in additional revenue for this contract line. In May, an add on to the contract requires a second MEA allocation that takes away revenue from the contract line. Example amounts are rounded to simplify the display.

Month	Event	Unbilled AR	Billed AR	Paid AR/Cash	Unbilled Deferred	Billed Deferred	Paid Deferred	Unbilled Sales	Billed Sales	Paid Sales
March	Save (Book) the contract line	Debit 1200			Credit 1200
March	Create MEA allocation	Debit 267			Credit 267
March	Generate Invoice for the 1st quarter		Debit 300			Credit 300
	(System reverses Unbilled)	Credit 300			Debit 300
March	Post one month of revenue					Debit 122			Credit 122
April	Post one month of revenue					Debit 122			Credit 122
May	Create 2nd MEA allocation	Credit 53			Debit 53
	(System reverses 1st allocation)	Credit 267			Debit 267
May	Receive payment		Credit 300	Debit 300
	(System posts to Paid Deferred Revenue)					Debit 56	Credit 56
	(System posts to Paid Sales Revenue)								Debit 244	Credit 244
May	Post one month of revenue (MEA amount=95) + (one-time adjustment amount= -53)						Debit 42			Credit 42
	Balance	847	0	300	847	0	14	0	0	286

Where to see contract posting events

You can view the transaction history for a contract or contract line via the Transaction History tab.

Transaction history tab page.

When accessed from the contract, the Transaction history tab displays the entire debit/credit history for the contract for each journal. When accessed from the contract line, this tab displays the debit/credit history for just the selected contract line. To view transaction history as of a certain date, enter a date in the As of date field and select Refresh.

There are two journal entries associated with each line/event combination. Auditors can use this information to verify the reclassification of Deferred Revenue, Sales Revenue, Accounts Receivable, and Expense GL entries.

Learn more about the Transaction history tab.

Where to see account balances

You can view the current Unbilled, Billed and Paid balances for your Accounts Receivable, Deferred Revenue, and Sales Revenue accounts in the Journal balances tab. You can access this tab from the contract or contract line.

The Journal balances tab showing different balances for different accounts.

The Journal Balances tab shows the balances for both revenue recognition journals. To view a GL report that shows a breakdown of an amount by each account, select the link in a desired column. From the report, you can drill-down to a specific journal entry.

Learn more about the Journal balances tab.