Linear recognition
- Ian Fondrk (Unlicensed)
Overview
In some transactions, the purchased products or services are delivered to the customer continuously over a period of time. Such scenarios are common for SaaS companies and companies selling subscriptions.
Based on accounting principles, revenue has to be recognized evenly across the entire service period regardless of when the payment is received.
Linear recognition rule is available on the Leapfin Platform to amortize transaction amounts over a given time period.
Configuration
Required Parameters:
Fields | Description |
|---|---|
| calendar date of when the product or service is purchased |
| full amount of the product or service |
| calendar date of when the delivery of product or service begins |
| calendar date of when the delivery of product or service ends |
Required Account:
Accounts | Description |
|---|---|
| e.g. "Account Receivable" (or "Cash" if the payment is received immediately) |
| e.g. "Deferred Revenue" |
| e.g. "Revenue" |
Walkthrough
Customer John purchased a 1-month subscription from Netflix for $9.99 on Jan 15th.
Event 1: item is purchased
When the subscription is purchased, the following journal entry is created. (Assuming the payment is made immediately upon purchase)
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
01/15/2022 | Cash | 9.99 |
|
| Deferred Revenue |
| 9.99 |
Besides, a series of amortization journal entries will be created to recognize revenue on a daily basis. Assume the 1-month subscription starts on Jan 15th and ends on Feb 14th. Both start and end dates are included in the subscription period.
Date | Account | Debit Amount | Credit Amount |
|---|---|---|---|
01/15/2022 | Deferred Revenue | 0.32 |
|
| Revenue |
| 0.32 |
01/16/2022 | Deferred Revenue | 0.32 |
|
| Revenue |
| 0.32 |
... |
|
|
|
02/14/2022 | Deferred Revenue | 0.32 |
|
| Revenue |
| 0.32 |
The daily amount is calculated by $9.99 / (number of days between 01/15/2022 and 02/14/2022) = $0.32.
See the Round logic section below for information on rounding treatment for sub-cent amounts.
Rounding logic
In linear recognition, Leapfin calculates a daily recognition amount using the full amount and length of the service period. A rounding logic below is applied to ensure that the sum of all daily amounts equals exactly the full amount.
Calculate the average amount per day as the full amount divided by the total number of days (inclusive of both the start and end dates)
Round the amount per day down to the nearest penny so there is no fractional penny amount
Iterate through each day from the start date to the end date, and add an extra cent to the day each time the accumulated rounding difference calculated above reaches 1 cent.
If there is any remainder from rounding after iterating through all of the days, the difference is added to the first day of the term.