Revenue Recognition makes it possible to match both revenues and expenses in the same accounting period. Using this principal, both revenues and
expenses are recognized when they are realized no matter when cash is received
or paid out. As part of the concept, matching revenues with expenses on financial statements is the cornerstone of accrual accounting.
Revenue Recognition Methods – The ways in which a
firm chooses to recognize revenue is unlimited. A few of the more common methods are described here. The basis for choosing any revenue recognition method is
the principle of matching revenue and expenses.
Revenue Method – Billing
One of the most common methods based on billing. Revenue is recognized at the time of invoicing. However, WIP (Work in Progress or Unbilled Receivables) is not recognized so this is not recommended for Accrual Accounting, as are all other examples.
Revenue Method – Percent Complete
Usually on Lump Sum or Fixed Fee Contracts, Project Managers assess where they are in the project and bill accordingly. These types of contracts can be billed as a Percent Complete on the project as a whole, or by Phase or Task. Under this method, there are two ways revenue recognition can occur. Using milestones or Costs incurred compared to the total estimated cost.
Revenue Method – Time & Material (T & M)
This method for standard contracts is one of the most simplistic. It is Labor & Expenses
at billing rates. Each time an invoice is generated, any adjustment (write-offs, write-ons, and transfers, changes to bill rates or markups) made to the labor and expenses accrued will adjust revenue up or down accordingly from that previously accrued.
Revenue Method – Variations
There are many variations to these and other revenue recognition methods.
Subject to a Max, is an example regardless of the method, revenue ceases to accrue when the total reaches the contract limit. Using this method still allows for additional
costs to accrue, and therefore the project profit and multiplier will drop accordingly.
Deltek Vision Revenue Generation – REV GEN
Revenue Generation lets you use Vision Accounting on an accrual basis, recognizing project revenue as it is earned matching revenue with expenses incurred to date, aka “Accrued Revenue”. Without Revenue Generation, Vision recognizes revenue only as it is billed.
Whether you use one of Vision’s standard revenue methods or a method you define, Vision accrues unbilled services for each project making journal entries automatically. It also updates each project’s related data for use by Vision in generating financial statements. If you select the most appropriate revenue method for each project, based on the project’s contract type, you can improve the accuracy of your project reports and financial statements.
In Vision, when you enable Rev Gen, you must create at least one Asset Account for Unbilled Receivables (WIP) and one Revenue Account for Uninvoiced or Unbilled Revenue. You can however choose to have multiple accounts for income statement purposes if desired. One for Labor, Reimbursable Expenses, Reimbursable Consultants, In House Recoverable/Misc. and Fee/Add-On’s or Additional Items. If
you choose to go this route you have a separate asset account for each as well.
Once the above is decided, Revenue Methods or Revenue Categories must be assigned to “every” project, and every phase and task on those projects. There
is a utility to do this systematically called Search & Replace. Great care needs to be done that full testing of any custom revenue methods prior to assigning to all projects.
When you run Rev Gen, Revenue accrues based on revenue methods assigned to each project. A journal entry is created and posted that will debit unbilled receivables and credit unbilled revenue. The amount on the balance sheet is the WIP, part of the total receivables for the firm. The amounts on the income statement are part of Gross Revenue, although not yet billed. They can be displayed separately or summed together with other Labor, Reimbursable & Other types of Billed Revenues. When you invoice, the unbilled receivable asset accounts are relieved for the amounts billed and
revenue is reclassified from the Uninvoiced Revenue accounts to the Billed Revenue Accounts.
You specify a project’s revenue method at the lowest level of its work breakdown structure. For example, if a project has tasks, you must enter the revenue method at the
task level for that project.
– When a project is complete
– Revenue = Billings (…..payments,
– When a project is still in progress
– Revenue = Billings + WIP
– This is where the dance begins…….. (“1″)
(1)”from the Kansas City Vision User Group”
Sometimes a tough concept to educate PM’s on. While Billings (sum of all invoices) is simple enough, how we measure WIP in terms of billable dollars is not so easily understood. The Theme is to fairly represent revenue based on what we have earned
(effort that is billable) as of a specific point in time whether we have billed it or not. But of course we need to be careful to not overstate revenue. WIP must be managed closely, just like other receivables. It is critical that you confirm that the sub-ledgers
(Project Reports) reconcile to the General Ledger. In other words a listing of the unbilled amounts (WIP) by project on a project report compared to the account balance on the balance sheet.
Timing is Critical – Running REV GEN
Because Revenue Generation calculates revenue on a job-to-date basis, you can run the utility whenever you want (multiple times during the same accounting period). To keep your project reports accurate and up-to-date, you should run Revenue Generation
at least once a month or at the end of each accounting period, most schedule and run nightly. To see current period revenue, simply run a current period Project Earnings Report.
Vision provides multiple reports that show the results of posting revenue. The Revenue Generation Posting Log found in Transaction Posting Logs. This report shows the prior JTD, new incremental job-to-date, and total job-to-date revenue that will be distributed to projects when the Revenue Generation file is posted. Additionally, there are several
Project Reports that will each report JTD, MTD & YTD Revenue found in Project Reporting. When configured correctly, these Project Reports will reconcile to the Income Statements to the penny serving as a drill down for the Gross Revenue, Net Revenue and Gross Profit sections of your income statement.
Billing Periods are critical. With REV GEN, financials are no longer dependent on billing since revenue is accrued. So billing generally is generated and booked in the subsequent period to when the revenue is accrued. In other words, June activity is billed in July, July in August etc.
WIP when reviewed may be considered by management to be overstated either because of the age of the unbilled receivables or because the unbilled is over fee. As stated above, WIP must be managed closely just like other receivables.
Billing in the following period is generally a new concept for most, but has some significant benefits. Financials can be reviewed usually within days of month end since no longer dependent on billing. Training and understanding is required, but other than the period change billing processes remain unchanged allowing for a very systematic close and a much faster review of company financials.
WIP Adjustments may be considered necessary when Unbilled Receivables appear to be at risk. Decisions can be made as to what the triggers are for adjusting revenue. Once determined, a monthly report is created which is then translated into an adjusting Journal Entry to adjust revenue down accordingly. This adjusting journal entry is reversed in the next period, each month then rebooked again at the end of the next period. This way, each month you again analyze the current unbilled receivables and adjust accordingly. The income statement reflects the net change of this adjustment (difference between current and prior month adjustment).
This can be automated using a Sql Query which would calculate the adjustment, create the journal entry which you would simply post in the closing period and then reverse in the new period at the appropriate times. All results are reportable using standard Vision Reporting, on both income statements and project reports.