Overview

Financial impacts of a Contract is often captured by "contract asset" (or "unbilled A/R") account. When a contract is signed, revenues are deferred across the period of the contract. When invoices are issued according to the contracts, funds are often moved from "contract asset" account to "A/R" account to indicate the right to payment.

Configuration

Required fields

Fields	Description
`date`	calendar date of when the contract is signed by all parties
`amount`	full amount of the contract
`start_date`	calendar date of when the amortization period starts. This date is included in amortization period.
`end_date`	calendar date of when the amortization period ends. This date is included in amortization period.

Required accounts

Account	Description
`contract_asset_account`	e.g. Contract Asset or Unbilled A/R
`deferred_revenue_account`	e.g. Deferred Revenue
`revenue_account`	e.g. Revenue
`ar_account`	e.g. Account Receivable

Walkthrough

A data vendor signed a 3-year contract with a university to provide access to its data for research purposes. The university will be billed quarterly or when the data access quota is hit within the quarter. The total contract amount is $36,000. The quarterly bill $3,000. The contract starts from Jan 1st 2022 and ends on Dec 31st 2024.

Event #1: Contract is signed

When the 3-year contract is signed on Dec 15th 2021 by both the data vendor and the university, the following journal entry will be booked

Date	Account	Debit Amount	Credit Amount
12/15/2021	`contract_asset_account`	36,000
	`deferred_revenue_account`		36,000

In addition, a series of amortization journal entries will be created to recognize revenue on a daily basis.

Date	Account	DR	CR
01/01/2022	`deferred_revenue_account`	32.85
	`revenue_account`		32.85
01/02/2022	`deferred_revenue_account`	32.85
	`revenue_account`		32.85
...
12/31/2024	`deferred_revenue_account`	32.85
	`revenue_account`		32.85

📘
The daily amount is calculated by $36,000 / (number of days between 01/01/2022 and 12/31/2024) = $32.85
Read here about the rounding treatment for sub-cent amounts.

Event #2: Invoice is issued

When the first quarterly invoice is issued at the end of Mar 2022, the following journal entries will be created:

Date	Account	Debit Amount	Credit Amount
03/31/2022	`ar_account`	1,000
	`contract_asset_account`		1,000