Determining the Revenue Recognition Method
One of the first steps in setting up your Job Cost system is choosing posting options. The posting option is dependent on your revenue recognition method. Your accountant can advise you on the method most appropriate for your business. Under the revenue recognition principle, revenues should be earned and realized before they are recognized. Posting then transfers the journal entries to the appropriate accounts in the general ledger.
The revenue recognition methods include:
Revenue Performance Obligations
The Revenue Performance Obligation revenue recognition method is used by companies that either enter into contracts with customers to transfer goods or services or enters into contract for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example: leases and insurance contracts). Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) http://www.fasb.org.
Each job can have one or more revenue codes assigned, depending on contract type. Original Transaction Price + Change Order Transaction Price Amount = Expected Transaction Price Amount. The total transaction price amounts for a job cannot exceed the Expected Contract Amount.
Percentage of Completion
The Percentage of Completion revenue recognition method records a job's revenue and expenses in each period, based on the actual percentage of the job completed during the period. Typically, all costs incurred for the period post to a general ledger work-in-process (WIP) account as a debit. A monthly journal entry is created to recognize revenue and the cost of sales using the following equation:
[Actual Cost (or Labor Hours) / Forecasted Cost (or Labor Hours)] x Contract Amount = Revenue Earned
As part of the month-end process, the following general ledger account adjustments are made to record revenue and expenses on your monthly profit-and-loss statement:
- Credit each WIP account (balance sheet)
- Credit the job revenue account (profit and loss)
- Debit the cost of jobs account (profit and loss)
- Debit the progress billings account (balance sheet)
- Debit to unbilled receivables or credit to billings in excess (balance sheet)
To use the Percentage of Completion revenue recognition method, mark the Revenue Recognition Method checkbox on the Posting Options window. The Closing Jobs Journal Entry checkbox on the Posting Options window will be marked automatically.
Completed Contract
With the Completed Contract revenue recognition method, the cost and revenue on a job are recorded only when the job is completed and closed. This can occur at any time during the fiscal year.
When the job is complete, the costs and revenues are removed from balance sheet accounts and transferred to profit-and-loss statement accounts such as cost of jobs and job revenue. To accurately adjust the general ledger when you close the job, Job Cost creates the following entries:
For expenses not yet posted to profit and loss accounts:
- Credits each WIP account (balance sheet)
- Debits the cost of jobs account (profit and loss)
For revenues not yet posted to profit and loss accounts:
- Debit the progress billings account (balance sheet)
- Credit the job revenue account (profit and loss)
To use the Completed Contract revenue recognition method, mark the Closing Jobs Journal Entry checkbox on the Posting Options window.
Immediate Recognition
With the Immediate Recognition method, you can record revenue when an invoice is created by using Job Cost's invoice accounts as revenue accounts. If you select this method, cost of sales is recognized as cost transactions are posted. Typically, no WIP accounts are used, and the cost code method of posting is used.
To use the immediate recognition method to recognize revenue, do not mark the Revenue Recognition Method checkbox or the Closing Jobs Journal Entry checkbox in the Posting Options window.