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Revenue Recognition Overview

SAPs revenue recognition functionality enables you to post the billing documents and recognize
revenue at different points in time. In the regular process, SAP recognizes revenue as soon as
the billing document is posted to accounting. The receivables account (customer account) and
the revenue account are posted with this transaction. However, certain business scenarios
require revenue to be recognized either before or after the invoice has been created. The
revenue recognition function provides a separate transaction (VF44) to trigger the recognition of
revenue. Here, two additional G/L accounts come into play:
The deferred revenue: If you bill the customer first and recognize revenue at a later point, the
amount is classified as deferred revenue
Unbilled receivables accounts: if the business requires you to recognize revenue periodically
but bill the customer later, then the amount is kept in the unbilled receivables account.

Suppose you have to bill the customer first and recognize revenue later. Heres what will
happen:
1. The billing document is posted: The receivables account and the deferred revenue account
are updated. Thus, you are billing the customer but not realizing the revenue yet.
2. The revenue recognition is posted: This offsets the deferred revenue account with the
revenue account. The revenue recognition is thus completed.

Process:
To discuss the process flow, well present a simple example. Suppose a customer has
purchased a one-year warranty from Galaxy for a specific musical instrument. The customer
has to be billed up front, but the revenue has to be recognized on a monthly basis over the life
of the contract. This is an example of time-based revenue recognition with up-front billing.
In this example, youd set up a service contract in SAP specifying the start and end dates. (For
details on contract creation, you would also create a billing document with reference to the
contract using VF01.
When it comes to revenue recognition, the system uses the contract start and end dates to
create equal buckets in which the revenue will be recognized. If the customer is billed for
$1,200, the revenue recognized per period will be $100 each, for 12 months.
The transaction that triggers the revenue recognition is VF44. You can access it from
SAP Menu Logistics Sales And Distribution Billing Revenue Recognition Edit
Revenue List.

The details are displayed, as seen in Figure

The Revenues data is displayed in the upper window, and the Control Lines data appears in the
lower one. The Control Lines record contains information such as the total value of the contract.
The Recog. Rev. field shows the total revenue recognized until date. Unrec. Rev. is the balance,
which is an unrecognized component. In this case, the customer has been invoiced for $1,200.
The revenue has been deferred; hence, the unrecognized revenue is $1,200.

The Revenues list shows the revenue amounts that would be recognized in the selected posting
period. Since in this example we are checking data for the entire life of the contract, we can see
12 revenue buckets spread over the posting periods. The Year/Per. field shows the posting
period and year. In every period, revenue will be recognized in equal amounts ($100). The
corresponding G/L accounts appear in the list.
In this example, suppose at the end of first period, the user selects the first line and clicks
Collective Processing. The accounting document is generated, and revenue is recognized to the
extent of the amount specified
Figure shows the accounting entries that are made at every step of the process.
The amount billed ($1,200) is placed in the deferred revenue account. Each month, a revenue
recognition entry is made for $100. It updates the revenue account and offsets the deferred
revenue account. This process continues every period until the total revenue has been
recognized.

Note:
You can cancel the entry using transaction VF46 if there is any mistake in recognizing revenue.
You can derive a revenue report using transaction VF45. It lists all the details related to a given
sales document. You can check all the revenue documents and cancellation documents that
have been posted over a period of time. It is possible to display the accounting documents that
have been created.

You can use sales orders with billing plans instead of contracts. In this case, the billing plan
dates control the revenue postings.
Another variation is when the revenue is to be recognized before the customer is billed.
Consider the example of Galaxys warranty. A variation could be that the customer is not billed
up front but instead billed quarterly, as per a billing plan attached to the contract. The revenue
will be recognized in each period. At the end of first period, a revenue of $100 is recognized, but
it has not been billed yet. In this case, it updates the Unbilled A/R account. Figure shows the
accounting entries for this variation of the process.

Now lets turn to service-based revenue recognition. In this case, the revenue recognition is
triggered by a specific event, such as posting a goods issue. Suppose a customer has placed
an order with for some musical instruments. As per the delivery schedule, some instruments are
to be delivered in the first quarter of the year, and others in the second. The customer will be
sent a combined invoice at the end. Whenever a delivery is created and a goods issue is
posted, you can trigger the recognition of revenue. This ensures that revenue is recognized in
each financial quarter, although the customer is billed at a later point in time.

Configuring Revenue Recognition


Configuring revenue recognition requires close coordination with SAP FI/CO consultants. Since
it is complex functionality, it is not open for configuration, and you have to contact SAP to get it
activated.
Step 1:
We have to set up G/L accounts to be used for deferred revenue and unbilled receivables.

Step 2: Revenue recognition for item categories.


To create the settings, follow the path IMG Sales And Distribution Basic Functions
Account Assignment/Costing Revenue Recognition Set Revenue Recognition For Item
Categories (OVEP).
Select the item category that you plan to activate, and go to the details screen.

Revenue Recognition In this field, specify the type of process you plan to use. In this field, you
can specify the revenue recognition category you are using, such as time-based or servicebased revenue recognition.

Proposed start date for accrual period This field controls the start of the accrual-posting
period
Revenue Distribution This field is used to control the distribution of amounts over a certain
period.
Revenue Event This field is used only in the case of revenue recognition category.

Step 3: Maintain Account Determination.


In this section, you will specify the G/L accounts to be used for deferred revenue and unbilled
receivables, respectively. Follow the path IMG Sales And Distribution Basic Functions
Account Assignment/Costing Revenue Recognition Maintain Account Determination
Assign G/L Accounts For Revenue And Deferred Revenue (transaction code VKOA).
The other setting you need to define is for the unbilled receivables account. Follow the menu
path IMG Sales And Distribution Basic Functions Account Assignment/Costing
Revenue Recognition Maintain Account Determination Assign Accounts For Unbilled
Receivables (transaction code OVUR).

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