The
deferred COGS account is the new feature introduced in Release 12. The key
fundamental behind the feature is that the COGS is now directly matched to the
Revenue. In simple terms, this means, COGS for an order line will be recognized
only if the revenue is recognized for that line making sure that the revenue
and COGS are posted in the same month. Matching percentage is also taken care
which ensures that revenue and cost are always in sync.
Understanding
Deferred Revenue and COGS accounting
•
The
basic fundamental behind the enhancement is that the COGS is now directly
matched to the Revenue.
•
The Matching Principle is a fundamental
accounting directive that mandates that revenue and its associated cost of
goods sold must be recognized in the same accounting period.
•
This enhancement will automate the matching of
Cost of Goods Sold (COGS) for a sales order line to the revenue that is billed
for that sales order line.
Steps
involved in Deferred Revenue and COGS accounting
Step1:
•
When
a Sales order is shipped the following accounting takes place:
Inventory Valuation Account: Credit.
Deferred COGS account: Debit
once the revenue is recognized, the user need to decide the percentage he/she wish to recognize to the Revenue.
Inventory Valuation Account: Credit.
Deferred COGS account: Debit
once the revenue is recognized, the user need to decide the percentage he/she wish to recognize to the Revenue.
•
A
COGS recognition transaction will be created to reflect a change in the revenue recognition percentage for
a sales order line.
Step:2
•
Run
the Collect Revenue Recognition Information program. This program will collect
the change in revenue recognition percentage based on AR events within the user
specified date range.
Step:3
•
Run
the Generate COGS Recognition Events. This program will create the COGS
recognition transaction for each sales order line where there is a mismatch
between the latest revenue recognition percentage and the current COGS
recognition percentage.
Step:4
•
The
distribution for the COGS Recognition transaction associated with the Sales
Order transaction now would be as follows:
Deferred
COGS: Debit revenue
percentage
COGS: Credit (Actual revenue percentage)
Step:5
•
Essentially
the recognized COGS balance is to move the value from Deferred COGS to COGS.
This particular COGS recognition transaction actually correspond to a revenue
recognition percentage change.
•
Navigate
to: Cost > View Transactions >
Material Transactions > Distributions to view the Transactions.
Step:6
•
Once
the whole cycle is complete Distributions for the transaction will have 2 lines:
Transaction 1:
Inventory Valuation account: Credit. (Item_cost)
Deferred COGS account: Debit (item_cost)
Inventory Valuation account: Credit. (Item_cost)
Deferred COGS account: Debit (item_cost)
Transaction 2:
Deferred COGS: Credit (Actual revenue percentage)
COGS: Debit (Actual revenue percentage)
Deferred COGS: Credit (Actual revenue percentage)
COGS: Debit (Actual revenue percentage)
