Revenue Recognition Rule Basics

Revenue Recognition Rules specify how revenue is recognized for products. Revenue recognition methods can be added manually or imported using a sample template. Revenue Recognition Rules are managed via Menu > Finance > Revenue Rules. Ordway offers the following revenue recognition methods:

Recognize on Invoicing 

Revenue is recognized using the invoice amount and date for a given invoice. The revenue posting date is equal to invoice date.

Note: Revenue Journal Entries are not generated for recognize on invoicing. 

Example: An invoice is issued for $10,000 with an invoice date Apr. 15th. All $10,000 of the invoice will be recognized immediately with a posting date of Apr. 15th.

Additional Information: Recognize on invoicing is not recommended as a Revenue Recognition Rule for usage based charges because revenue is typically recognized in the financial period of the usage record date and invoiced in arrears.

Straight-line, Prorated

Revenue is recognized in equal amounts for full periods that fall within the recognition start and end date of a subscription charge. For partial periods, revenue is prorated and recognized based on the number of active days in the period.

Example: An annual subscription for $12,000 that starts on Oct. 15th will earn $548.39 (Oct 15th to Oct 31st = 17 active days) in the period of October, $1,000 in the periods of November through September, and then $451.61 in the period of October with the contract ending on Oct. 14th (Oct 1st to Oct 14th = 14 active days).

Exact Days, Prorated

Revenue is recognized based on a daily method where each day that falls within the recognition start and end of a subscription charge is allocated an equal amount of revenue to be earned.

Example: An annual subscription for $12,000 that starts on Oct. 1st will recognize $1,016.39 in 31-day months, $983.61 in 30-day months ($983.62 for September), and $950.82 the period of February.

Straight-line, Front loaded

Revenue is recognized in equal amounts where a full period of revenue is recognized in the first month of the contract term regardless of the day of the month that the contract starts. No revenue is recognized in the last month of the contract term when there is a partial period end date to the term.

Example: 12 month contract starting on the 15th of the month has total revenue of $12,000. $1,000 in revenue is recognized per month. 

The first month recognizes the full $1,000 amount, even though the contract started on the 15th. Therefore,  no revenue will be recognized in the last month (roughly 15 days) of the contract.

Straight-line, Even periods 

Revenue is spread equally and recognized across all periods in which the contract is active.

Note: Most Ordway users select Straight-line-prorated instead which prorates the partial periods and then evenly spreads the remaining over full periods. Straight-line even periods is not the best revenue rule when changes are involved.  

Example: An annual subscription for $12,000 that starts on Oct. 15th will recognize $923.08 in all active periods beginning in October through September, and then recognize $923.04 in the period of October.

Custom

Custom revenue rules are designed for recognition schedules where a percentage of the total value of a subscription charge can be recognized on a percentage basis. The schedules can be offset or broken out by period and a percentage is then assigned to each period. The total percent to recognize must equal 100% and period schedule can be set to monthly, quarterly, semi-annually, or annually.

If revenue should be recognized in the first month of the schedule, then the first period should be offset by 0 periods.

Example: For an annual schedule recognized monthly, the period offset would be set from 0-11, where month 12 of the schedule is offset from the first month by 11 periods.

Notes: When importing usage data to recognize revenue, the revenue will be earned on the date of the usage, regardless of what revenue recognition method has been selected for the product.