Record to Report

Unit-I
Revenue Accounting

Overview of R2R
Record to Report is a term which is very specific to the outsourcing industry for Finance and
Accounting (F&A).
R2R stands for Record to Report.
When we look at any organisation which is writing its books of accounts, it would be
recording all the financial transactions in its day books which would be followed by posting
them in the respective ledgers and making the Trial Balance. This entire process is about
recording. Once the trial balance is done, it is followed by the Profit and Loss and the
Balance sheet and it would present these numbers to its stakeholders such as shareholders,
bankers, financial institutions, suppliers, customers and even internal users such as the
management and employees. These numbers express the health of the Company. This is
called 'Reporting’ .
All the large groups like Accenture, TCS, Deloitte etc have smaller companies within them.
These companies. operate as individual entities and consolidate with the group. They are
responsible for their own P&L. They have their own Fixed Assets (such as assets held for the
purpose of producing or providing goods/services, for example Land & Building or Plant and
Machinery / Office Equipment) and their own markets where their own or their other group
concern produce is sold. Some of the problems that the parent group would face when they
have to consolidate their final group accounts are as follows:-
a) units could be closing their books of accounts in different currencies
b) units could be closing their books of accounts in different financial calendars
c) units would be transacting between themselves
d) units would be sharing assets and other resources like Fixed Assets shared among
themselves.
Therefore it becomes very important to capture the transactions properly and report them. In
order to capture these transactions properly there is a need to have standard processes across
different units of the large company. The entire business cycle of these large companies is
therefore categorized into processes. All the activities from procuring raw materials to paying
the suppliers for raw materials are included in one process namely "Procure to Pay" which is
also called "P2P" process. Similarly all the activities from recording to reporting of
transactions are included "Record to Report" or "R2R" process and all the activities from
Order (receipt of sales order) to Cash (cash collection and . application against customer
invoice) are included in "Order to Cash" (02C) process.
The R2R process is carried out in three stages as defined below:
 1. The Setting Up Stage
2. The Execution Stage
3. The Communication and Control Stage

The Setting Up Stage is when the controllership of the organisation would be setting up the
rules and regulations for being able to effectively conduct the record to report function.
The policies and procedures for executing Journal entries are established and communicated
by the organization to the operations teams. Besides, all the necessary formats and templates
are also established and communicated. The operations teams are trained to understand the
policies, procedures and templates So that they are executed and maintained in the intended
way. Another very important aspect of record to report is the technology that we have to
decide at the time of setting up. Should it a standalone financial accounting package or should
be complete integrated ERP systems?
It could also be a client server or completely web based one depending on where are the
locations of units etc.

The Execution Stage - Once the systems and procedures are set up, the actual execution
commences. In the execution process, we have the following steps:
Step 1: The journal entry is created and submitted for review and approval
Step 2: The journal entry is reviewed and approved or is not approved.
Step 3: These journals are then further verified.
Step 4 Journal entries are then posted: either through the manual or automated system.
The examples of a JOURNAL ENTRY include:-
a) Adjusting Journal for reconciliation' items
b) Accruals for unprocessed invoices & Business expenses & other liabilities
c) Prepayment
d) Payroll (salary Debit, salary payables credit)
e) Fixed Assets (Depreciation debit, fixed assets credit)
f) Inventory
g) Travel & Expense (ref. Procure to Pay)
h) Procurement cards
i) Tax

R2R-IMPORTANCE TO BUSINESS
R2R is an essential and integral part of any business seeking financial success. Recording and
Reporting build the historical data of an organization's business activities over time. The
accuracy and quality with which these processes are accomplished affects the organization's
ability at building business credit and financial success. It is through this tool, that the public,
investors, creditors, government agencies, law agencies and employees come to know of the
worth of the business. It is important for both internal and external users.
Within the company, it becomes a necessity because of the following reasons:
• Basis of formulating budgets
• Required for internal audits
• Is an important source of information for stake holders
• Measuring current performance against past performances
• Means of making amends if any, judging from past experiences
• Gives a clear picture of the financial standing of the business, increasing employee
expectations of returns.
• Means of providing information to policy makers to create and implement plans
• Aids in determining areas of deficiency, thus helping in cutting costs. For external users too,
financial accounting and reporting is of extreme importance:
• Gives a clear picture of the financial standing of the business to potential investors, helping
them in deciding whether or not to invest in a particular firm
• Gives adequate information to existing investors about the future of their investments
• The financial statements are the main criteria for creditors to take decisions about extending
credit to firms
• Financial statements are a mandatory-tool for tax agencies and are required for external
audits

What is Revenue Accounting?

Revenue in accounting refers to the entire amount of money made through selling products
and services from a company’s core operations.
Revenue is another word for business income, sometimes called sales or turnover.
Due to revenue’s importance, it’s often referred to as the “top line” in accounting.
Companies create different revenue accounts to differentiate earned revenue by type.
Revenue accounts are crucial for better financial overview and reporting.
Revenue accounts contribute to companies’ ability to make informed decisions and strategic
planning.
In its simplest form, the revenue formula will multiply the number of sales by the selling
price.
Revenue calculation has two variables:
 The number of units sold
For the number of units sold, we can take the actual number of products sold or, in the
case of services, the number of customers who bought or subscribed to the service.
 The sales price
The sales price can be fixed or variable, for instance, because of discounts. In the case
of variable price, the price used in the calculation will be the average sales price of
goods or services.
Revenue Formula for goods
Revenue = number of goods sold * fixed or average price of goods
Revenue Formula for services
Revenue = number of customers * fixed or average price of service
Revenue Accounts & Accountants
As mentioned, revenue accounts are created to divide the company’s earnings.
The financial administration of many different sectors depends on revenue accountants who
oversee the revenue accounts.
They are also referred to as senior accountants. Accordingly, the revenue accountant’s
responsibilities might vary significantly based on th type of company.
The person employed in this role is responsible for tracking and reporting incoming revenue,
producing bills, maintaining precise transaction records, and collaborating closely with other
departments to resolve issues and reconcile payments.
A revenue accountant is also in charge of creating new reporting, editing old reporting, and
strengthening internal controls over revenue by developing and executing policies and
processes across the entire organization.
Revenue accountants prepare reports and forecast that the executives study and use to guide
future operational and strategic planning decisions.
Knowing where a company creates revenue and how successful it is, is crucial for success.
Revenue Accounting with a Billing Software
Revenue accounting is normally done with the help of a billing and revenue
management platform, a billing software designed to automate the entire billing and revenue
recognition process.
Therefore, revenue accounting is essential to every business’s accounting and analytical
department.
Revenue accounting is a basis for revenue management, a set of data-driven tactics and
strategies every company uses.
Types of Revenue Accounts
Operating and non-operating revenues are the two different sorts of revenue.
Most of the business’s net income comes from operations, and they aim to expand the
operations.
Conversely, non-operating revenues usually account for a small portion of total revenue and
comprise additional money unrelated to their core business.
Some types of revenue accounts include:
Sales
The Revenues/Sales account records incoming funds from primary business operations and
operating revenue.
Some businesses may be more explicit in naming sales accounts.
Service Revenue, for example, is a sort of account that tracks sales from services a business
provides.
Rent Revenue
If a business has buildings or equipment for rent, it must make a Rent Revenue account.
This is a non-operating revenue if the rents are made in advance.
A business would record it as an unearned rent revenue account since tenants pay before
using the space.
Once a business earns the revenue, it can reduce the unearned rent revenue account and
increase the rent revenue account.
Dividend Revenue
If a business owns stocks in other companies, it will receive dividend payments.
Dividend revenue is another non-operating revenue because it is not a day-to-day activity and
is not the primary operation of the business.
Interest Revenue
Another non-operating revenue is interest revenue.
A business must create an interest revenue account if they have investments earning interest.
For example, a business invests money into another business and earns interest.
It will help if a business records the interest revenue as its journal entry.
Contra Revenue – Sales Return and Discount
Contra revenue accounts deduct money from a business’s sales revenue.
A business needs to debit these accounts and credit the corresponding account, like accounts
receivables.
A business can have a sales return account or a sales discount account that will record money
reimbursed to clients.
The Sales Discounts account contains the business’s discounts to its customers.
Revenue Accounting & the Revenue Backlog
The revenue backlog includes the value of committed revenue in subscription agreements that
are not yet fulfilled. Therefore they can’t be recognized.
While revenue backlog can exist in both traditional and subscription businesses, the structure
of subscription models’ revenue recognition causes nearly all subscription organizations to
have a revenue backlog.
The revenue backlog is the entire amount of unrecognized revenue in the revenue schedule
for the term of a SaaS or subscription agreement.
It can include revenue from subscription-based and one-time services, such as training and
implementation.
The backlog includes revenue that is not yet recognizable due to pending customer
acceptance criteria, incomplete delivery of professional services, and other issues.
However, the revenue backlog might include the future value of current or pending
subscriptions.
A business should only include revenue in the backlog of revenues if there is solid
recognition or proof that both business and the customer will fulfill the subscription or license
agreement’s obligations.

Revenue vs. Profit

Before we can delve into the accounting aspect of revenue, we will see the difference
between revenue and profit.
X sells snacks. He has been in business for over ten years so to further deepen his overall
profits he invested some money in a start-up restaurant down the road. This year, his return
on investment was approximately INR 5,000. From snacks sales he brought in over INR
20,000 in the same year.
x’s total revenue is INR 25,000 for this year.
INR 5,000 (investment return) + INR 20,000 (sales) = INR 25,000 (revenue)
X initially invested INR 1,000 to the start-up restaurant and he spent INR 7,000 on buying
raw materials and marketing his business (the cost of these supplies is called cost of goods
and services (COGS)). So, X’s profit is INR 8,000 less than his total revenue.
INR 1,000 (investment) + INR 7,000 (cost of goods and services) = INR 8,000 (expenses)
This means that X’s total profit is his total revenue minus expenses.
INR 25,000 (revenue) – INR 8,000 (expenses) = INR 17,000
See the difference? There are other expenses like operating costs and product returns or
applied discounts, too.
Revenue Accounting
Revenue is all of the money coming into the company.
This is a bit deceiving of a number as no taxes, expenses or accounts payable are taken into
account when calculating this number.
Revenue is often referred to by most companies as turnover or the top line.
Top line refers to revenue’s position on a financial report. It is the umbrella number at the top
of the report with all of the detailed information about spending and expenses listed below.
Contrarily, the bottom line is net income which shows actual profits that the shareholders of
the company are entitled to.
There are two popular methods of revenue accounting used worldwide, cash basis accounting
and accrual basis accounting.
These avenues of accounting are strictly governed by accounting regulatory standards like
generally accepted accounting principles (GAAP) and the International Financing Reporting
Standards (IFRS).
Revenue Recognition
Cash basis accounting is pretty simple. When a job is done, or a product purchased and the
customer pays – you record it in your financing book. You would not record any payment or
expense of a financial transaction has not occurred. This is opposite to the accrual basis
accounting method.
Accrual basis accounting is a popular method of tracking costs and revenues. The
fundamental practice of this method requires the company to record all revenue or costs in
the books regardless if the money has been received or paid.
For example, I agree to cut Mark’s lawn. I show up on Saturday and finish the job. He
doesn’t pay me, but says he will next week. I go ahead and add the payment as income on my
budget – even though I haven’t been paid. Likewise, if Mark cut my lawn and I decided to
pay him in two weeks, I would mark this as an already incurred expense in my budget.
Types of Revenue
As we saw with X’s snack shop, revenue can come in different forms. General revenue, or
revenue produced by sales of goods or services is the most typical kind of revenue for a
business to have. However, if there are investments made or perhaps property rented out at
the business location to another entity, these would be recorded as separate from sales
revenue as other revenue on a financial report. This conveys that the other revenue is not a
central income for the company, instead, more peripheral.
Sales revenue is a term in revenue accounting that shows the total revenue of a
company less the cost of damaged, discounted or returned products. Sales revenue is also
sometimes called net revenue or net sales. Sales revenue does not include taxes nor does it
include any incidental income gained from interest on loans or sitting savings accounts.
Using Revenue in Accounting
When you isolate the revenue figure – it’s not exactly forthcoming. It means nothing unless
it’s applied a series of calculations to end up with the gross margin and net income. These
two figures are the true indicators of the health of a business. To calculate the net income we
use the following formula:
Revenue (assets coming in) – expenses (assets going out) = net income (profit)
We know that X had a revenue of INR 25,000 and his cost of goods and services was INR
7,000. We need to account for his operational expenses which includes overhead like rent,
utilities, payroll and taxes. X’s operational expenses are INR 6,000 for the year. So now we
can use the figures to find his net income or the bottom line.
INR 25,000 (revenue) – INR 7,000 (COGS) – INR 6,000 (operational expenses) = INR
12,000 (net income)
There are other equations we can do to find out the gross margin and the profit margin.
Gross margin explains how well sales revenue covers the costs associated with making the
goods being sold.
The profit margin is a calculation done to identify how well a company turns revenue into
profits. This is an important figure to find out if your company is seeking investors. Here are
the formulas:
revenue – cost of goods sold = gross margin
and
net income/sales = profit margin
We know X’s revenue, net income, sales and cost of goods sold so now we just plug in the
numbers.
Gross margin=
25,000 (revenue) – 7,000 (COGS) = INR 18,000 (gross margin)
In this circumstance, x’s COGS are very well covered by his sales revenue. Remember, X’s
sales for this year were INR 20,000.
Profit margin=
INR 12,000 (net income) / INR 20,000 (sales) = .6 or 60% (profit margin)
That is huge profit margin. Investors would be happy to see this number and would likely
want to invest their money into the growth of the business.

IFRS-15
IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with
earlier application permitted.
IFRS 15 establishes the principles that an entity applies when reporting information about the
nature, amount, timing and uncertainty of revenue and cash flows from a contract with a
customer. Applying IFRS 15, an entity recognises revenue to depict the transfer of promised
goods or services to the customer in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
 1. Identify the contract
 2. Identify separate performance obligations
 3. Determine the transaction price
 4. Allocate transaction price to performance obligations
 5. Recognise revenue when each performance obligation is satisfied
IFRS 15 became mandatory for accounting periods beginning on or after 1 January 2018. As
entities and groups using the international accounting framework leave the old regime
behind, let’s look at the more prescriptive new standard.
Changes, which include replacing the concept of transfer of ‘risks and rewards’ with ‘control’
and the introduction of ‘performance obligations’ alongside extensive disclosures, are likely
to put more pressure on accountants and auditors to closely evaluate client contracts and
challenge directors' judgements.
IFRS 15, revenue from contracts with customers, establishes the specific steps for revenue
recognition. It is important to note that there are some exclusions from IFRS 15 such as:
 Lease contracts (IAS 17)
 Insurance contracts (IFRS 4)
 Financial instruments (IFRS 9)
Here, we summarise the following five steps of revenue recognition and illustrative practical
application for the most common scenarios:
1. Identify the contract
2. Identify separate performance obligations
3. Determine the transaction price
4. Allocate transaction price to performance obligations
5. Recognise revenue when each performance obligation is satisfied.

1. Identify the contract

 Contract can have a written and non-written form or be implied (contract may not be
limited to goods or services explicitly mentioned in a contract, but also include those
expected to be delivered due to business practices or statements made)
 Should be approved by parties, and have a commercial basis
 Should create enforceable rights and obligations between parties
 Should have a consideration established taking into account ability and intention to
pay
New contracts may arise when terms of existing contracts are modified. Contract
modifications:
 Could result in retrospective or prospective adjustments to an existing contract,
creation of a new contract alongside the old contract, or a termination of the original
contract and creation of a new contract
 New contract arises as a result of modifications if:
o a new performance obligation is added to a contract. If a customer orders
additional units at a later date, the additional order is considered distinct, even
if the order is for identical goods
 o the price at which the additional units are sold represents a standalone selling
price at the time of modification. This is a price at which the product would be
sold on the market, rather than a significantly different price, for example
heavily discounted despite the product being the same and of the same quality
(for example to entice more future business from that customer)
 Continuation of an existing contract arises when:
o no distinct goods or services are provided as part of the modification
o performance obligation can be satisfied at modification date – for example, a
customer negotiates a discount in relation to units already delivered, for
example due to unsatisfactory quality or service relating to the delivered units
only
2. Identify separate performance obligations
 A performance obligation is a distinct promise to transfer specific goods or services,
distinct from other goods or services
 Performance obligation is distinct when its fulfilment:
o provides specific benefits associated with it, in its own right or together with
other fulfilled obligations
o is separable from other obligations in the contract – goods or services offered
are not integrated or dependent on other goods or services provided already
under the contract; the obligation provides goods or services rather than only
modifies goods or services already provided
The following are examples of circumstances which do not give rise to a performance
obligation:
 providing goods at scrap value
 activities relating to internal administrative contract set-up
Identifying performance obligations may result in unbundling contracts into performance
obligations, or combining contracts into a performance obligation, to recognise revenue
correctly.
Unbundling a contract may apply when incentives are offered at the time of sale, such as free
servicing or enhanced warranties. In this case servicing and warranties are performance
obligations that are distinct and revenue relating to them needs to be recognised separately
from the goods or services promised on the contract to which they relate.
Circumstances which could result in contracts being combined:
 it is negotiated as a package with a single commercial objective
 consideration for one contract depends on the price or performance of the other
contract
3. Determine the transaction price
  Transaction price is the most likely value the entity expects to be entitled to in
exchange for the promised goods or services supplied under a contract
 May include significant financing components and incentives and non-cash amounts
offered, which affect how revenue is recognised (see below)
Variable amounts of consideration:
 may arise as a result of discounts, rebates, refunds, credits, concessions, incentives,
performance bonuses, penalties, and contingent payments
 variable consideration is only recognised when it is highly probable that there will not
be a significant reversal in the cumulative amount of revenue recognised to date
 no revenue is recognised if the vendor expects goods to be returned
o instead a provision matching the asset is recognised at the same time as the
asset, with an adjustment to cost of sales
o the restriction results in a later recognition of revenue and profit (once there is
certainly the goods will not be returned) in comparison with current
accounting
 variable consideration is measured by reference to two methods
o expected value for the contract portfolio (for a large number of contracts), or
o single most likely outcome amount (if there are only two potential outcomes)
Adjustments for the effects of the time value of money (a ‘financing component’):
 if a financing component is significant, IFRS 15 requires an adjustment to be made
for the effect of implicit financing
o cash received in advance from buyer – vendor to recognise finance cost and
increase in deferred revenue
o cash received in arrears from buyer – vendor to recognise finance income and
reduction in revenue
 no adjustment for a financing component is needed if payment is settled within one
year of goods or services transferred
 the following do not give rise to a financing component (and hence no adjustment is
needed):
o customer has discretion over the timing of the transfer of control of the goods
or services
o consideration is variable and the amount or timing depends on factors outside
of parties’ control
o the difference between the consideration and cash selling price arises for other
non-financing reasons (ie performance protection)
4. Allocate transaction price to performance obligations
 Allocation is based on the standalone selling price of goods or services forming that
performance obligation
Allocation of transaction price may include allocation of discounts, which are applied:
 on a proportionate basis to all performance obligations based on the stand-alone
selling price of each performance obligation (observable or estimated), or
 to specific performance obligations only, if
o observable evidence exists evidencing that the discount relates to those
specific obligations only; and
o goods / services stipulated in the performance obligation are regularly sold as
stand-alone and at a discount; and
o discount is substantially the same as the discount usually given when goods /
services are sold on a stand-alone basis
Variable consideration is applied to a specific performance obligation if:
 terms relating to varying the consideration relate to satisfying that specific
performance obligation
 amount of variable consideration allocated is what the entity expects to receive for
satisfying the performance obligation
Contract modifications may require reassessment how consideration is allocated to
performance obligations.
5. Recognise revenue when each performance obligation is satisfied
 The point of revenue recognition is the point when performance obligation is
satisfied, per each distinctive obligation
 May result in revenue recognition at a point in time or over time
Recognition over time applies when:
 the customer simultaneously receives and consumes the asset/service as the vendor
performs the service, or
 the vendor’s performance creates or enhances an asset (for example, work in
progress) that is controlled by the customer as the work progresses.
The vendor’s performance creates an asset, when:
 the asset has no alternative use to the vendor:
o the vendor is restricted from using the asset for any other purpose other than
selling it to that specific customer, for example
 o the asset is manufactured to specific specifications or delivery time, meaning
that from the point of commencement of asset creation, it is clear the asset is
for a specific customer
o the entity cannot practically or contractually sell the asset to a different
customer as it would be practically and contractually prohibitive (for example
would require a costly rework, selling at a reduced price, or if customer can
prohibit redirection)
o no such practical or contractual limitations would apply if the entity
production is that of identical assets in bulk, and those assets are
interchangeable
 the vendor has an enforceable right to be paid for work completed to date
 the vendor does not have an enforceable right to pay when, for example:
o terms of contract allow customer to cancel or modify the contract
o the contract allows for circumstances where customer does not have to pay at
all
o the customer can pay an amount other than the value of the asset or service
created to date (ie compensation only)
o for a compensation to be treated as consideration and fulfil the condition of
enforceable right to be paid, the compensation would have to approximate the
selling price for the asset, or part of it equal to the proportion of work
completed
How to recognise revenue over time:
 To the extent that each of the performance obligations has been satisfied. This can be
established using two methods:
o output method - direct measurement of the value of goods or services
transferred to date for example per surveys of completion to date, appraisals of
results achieved, milestones reached, units produced/delivered; or
o input method - based on measures such as resources consumed, costs incurred
(but see below re contract set up costs), number of hours per time sheets or
machine hours, which are directly related to the vendor's performance
 Contract set up activities and preparatory tasks necessary to fulfil a contract do not
form part of revenue, and may meet capital recognition asset requirements (see
below)
Capitalisation of costs associated with a sale contract (for example bidding costs, sales
commission)
 Only incremental costs of obtaining a contract (which would not have been incurred if
the contract had not been obtained) to be considered, for example:
o direct sales commissions payable if contract is awarded - include
 o costs of running a legal department proving an across-business legal support
function - exclude
 Capitalise – if expected to be recovered (contract will generate profits)
 Amortise on a basis that is consistent with the transfer of the goods or services
specified in the contract

EXAMPLE:
Some contracts may involve more than one performance obligation. For example, the sale of
a car with a complementary driving lesson would be considered as two performance
obligations – the first being the car itself and the second being the driving lesson.
Performance obligations must be distinct from each other. The following conditions must be
satisfied for a good or service to be distinct:
 The buyer (customer) can benefit from the goods or services on its own.
 The good or service is separately identified in the contract.
The transaction price is usually readily determined; most contracts involve a fixed amount.
For example, a price of $20,000 for the sale of a car with a complementary driving lesson.
The transaction price, in this case, would be $20,000.
The allocation of the transaction price to more than one performance obligation should be
based on the standalone selling prices of the performance obligations.
For example, a contract involves the sale of a car with a complementary driving lesson. The
total transaction price is $20,000. The standalone selling price of the car is $19,000 while the
standalone selling price of the driving lesson is $1,000. The transaction price allocation
would be as follows:

Note: The percentage of the total is simply the standalone price divided by the total
standalone price. For example, the percentage of total for the car would be calculated as
$19,000 / $20,000 = 95%.
Recall the conditions for revenue recognition. Conditions (1) and (2) state that revenue would
be recognized when the seller has done what is expected to be entitled to payment. Therefore,
revenue is recognized either:
 At a point in time; or
 Over time
In the example above, the revenue associated with the car would be recognized at the point in
time when the buyer takes possession of the car. On the other hand, the complementary
driving lesson would be recognized when the service is provided.
The revenue recognition journal entries for the two performance obligations (car and driving
lesson) would be as follows:
For the sale of the car and complimentary driving lesson:

Note: Revenue is recognized for the sale of the car ($18,050) but not for the complementary
driving lesson because it has not yet been provided.
When the complementary driving lesson has been provided:

Note: Revenue is deferred until the driving lesson has been provided.