ASU 2014-09 Topic 606 (ASC 606) codifies new revenue rules for virtually all industries. It went into effect for private companies for financial periods beginning after December 15, 2017, and a year earlier for public companies.
ASC 606 creates a five-step process for recognizing revenue.
- Identify the contract with a customer
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue as the performance obligations are satisfied
Topic 606 will significantly change how we recognize revenues. Once you’ve identified exactly how the standard will affect your industry and your business, it’s time to make accurate journal entries.
This blog is about going back to the basics in accounting, and the objective of the post is to walk you through the correct way to book a revenue recognition journal entry under ASC 606.
Journal: Revenue Recognition under ASC 606
Frequency: Each reporting period (i.e. monthly), or as performance obligations are satisfied
FloQast folder location: ‘Deferred Revenue’ is an area of your balance sheet, and will have a corresponding folder in FloQast (Learn more about FloQast folders)
The Debits & Credits
When you invoice the client, you record the receivable and corresponding deferred revenue liability:
|Deferred Revenue (liability) – Performance obligation A||$10,000|
|Deferred Revenue (liability) – Performance obligation B||$5,000|
|Deferred Revenue (liability) – Performance obligation C||$85,000|
Memo: To record deferred revenue when invoicing a client
As performance obligations are satisfied, you’ll debit (reduce) Deferred Revenue and credit (increase) the appropriate amount of Revenue:
|6/30/17||Deferred Revenue (liability) – Performance obligation A||$10,000|
|Deferred Revenue (liability) – Performance obligation C||$7,083|
|Revenue – Product line XYZ||$10,000|
|Revenue – Product line ABC||$7,083|
Memo: To record revenue performance obligations satisfied in June
You should be able to identify all the contracts, by performance obligation, that roll up into your deferred revenue balance at each month end. (Click here for 3 best practice Excel reconciliation templates)
- Contracts not designed with new revenue recognition standards in mind: Make sure your contracts will facilitate accounting.
- Not bringing in your CPA early enough: Don’t wait until audit fieldwork time to show your CPA how you’ve adjusted your accounting, reporting, and disclosures. Talk to them early and often about how ASC 606 might affect your company.
- Not having the right software: your billing software may no longer be sufficient. Be sure to understand if your technology needs have changed.
- If applicable to your business, make sure you read up on the 5 elements of a “contract,” cancellation rights, contract modifications, refund liabilities, financing components of a contract, royalties, variable consideration, discounts, and even the recognition of related expenses like customer acquisition costs (aka deferred commission).
How Auditors Audit
Auditors will vouch the revenue on your financial statements right back to contracts. Make sure your company files well, has a clean sales order to cash process, and records revenue granularly – right down to the contract line item level.