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Author's profile photo Sarvottam Darshan

SD based revenue recognition in SAP

Executive Summary:

Amounts received from customers can or cannot be considered as realized revenue depending on the status of the delivery/legal transfer of title of the product or services. IAS 18, SOX and IFRS lay down detailed norms on revenue recognition. Revenues are recognized when they are realized or realizable, and are earned, usually when goods are transferred or services rendered. Essentially, it is considered fine to recognize revenue as soon as the manufacturer/service provider carries no further liability of the goods/services dispatched/rendered in any sense of the transaction.

In some cases businesses may take advance payments from customers. Advance payments could be of two types:

·100 % Cash in advance of the order value.

·Multiple part payments before the order is shipped ( eg. 10 % when order is booked, 50 % when order is ready to ship etc)

While the payment is received, the goods/service has not yet been completely delivered to the customer. In such a case the advance payment is treated as deferred revenue (liability) and no revenue is recorded unless the goods/services are delivered. Since the customer has paid an advance amount, he/she may ask for a billing document for the same. In some countries, especially in Europe, it is a non-compliance to collect advance payment from the customer using a proforma invoice. In such cases the customer needs to be provided with an actual tax invoice against which the customer can make the advance payment. As per revenue recognition guidelines while billing may be done in such cases it should not post to revenue account but to a deferred revenue account (liability account).

This whitepaper specifically discusses a compliant SAP standard solution of revenue recognition in case of advance payments. Specific insights from live projects have been added to enrich the content to make it useful for interested SAP consultants to solve some of the known implementation issues related to SD based revenue recognition functionality of SAP.

Note: Sound understanding of SAP SD-FI integration is a pre-requisite to this reading.

Business requirement:

The general, sales cycle involves creation of sales order, passing demand in to MRP , picking, packing and delivery on the sales logistics side. Billing is done post delivery. At billing, revenue gets posted to financial accounting. The accounting entry that gets posted at billing in this case is as follows:

Receivables A/c        Dr

Revenue A/c             Cr

The customer can then pay for the goods received basis the billing done.

In case of advance payment scenarios customers pay ahead of the delivery. The amount thus received cannot be treated as revenue. It needs to be shown as deferred revenue (liability). The accounting that should get posted in this case should be:

Receivables A/c                       Dr

Deferred Revenue A/c             Cr

Imp Note :-  It is very important to note here that as per the revenue recognition functionality, Tax amount for the Advance payment which gets calculated in the Billing document cannot be deferred and for each billing document it is calculated proportionate to the revenue amount in the billing document.

Once the delivery has been made and the manufacturer does not have any further liability of the goods sold/dispatched, revenue can be recognized. The accounting that should get posted at that instance should be:

Deferred Revenue A/c         Dr

Revenue A/c                         Cr

With increasing need for compliance, businesses are looking forward to solutions which can make the correct recording in accounting and ensure that they are compliant with the international guidelines on revenue recognition.

SAP Standard Solution:

In general billing scenarios the revenue account gets determined basis the VKOA setup in SAP. For advance payment cases discussed above it is required to circumvent the normal SAP VKOA setup and post to a deferred revenue account. SAP provides this ability as a special activation request i.e  the functionality is not available in standard SAP but has to be activated separately post a system audit and confirmation by SAP (Please refer SAP-notes 779366 and 605665-: special activation guidelines from SAP)

SD based revenue recognition functionality of SAP is recommended for the following scenarios:

  • Periodic revenue recognition based on specified periods. This is known as time-related revenue recognition method. Example: Revenue for annual contracts where a monthly service is provided and revenue for the corresponding period recognized at each month end.
  • Revenue recognition based on a specific event like delivery of goods or completion of service. This is known as Service-related revenue recognition Example: business receives advance from customer but the transfer of title for the good happens only after the customer sends confirmation of goods received. Post acceptance from the customer the revenue recognition can take place. Acceptance by customer is the event which will trigger revenue recognition in this case.

  SD based revenue recognition functionality of SAP also addresses some other key business requirements. This functionality gives the ability to:

  • track revenues which have been recognized but not yet billed (non-billed receivables)
  • track revenue which has been billed but not yet recognized (calculated revenue)
  • Recognize revenue partially for partial deliveries done.

  All constraints of this functionality are documented in detail in SAP notes 678260.

Detailed Setup:

Setup for this functionality includes the following steps:

  1. Special activation of the functionality as per notes 779366 and 605665
  2. SD related Setup

  ·         Sales order Setup: – A Header level billing plan should be activated for the sales order type. The Billing plan will be used to setup Milestones for Billing, In case of  100 % Cash in advance, you can setup one milestone, in case of multiple part payments, you can setup multiple milestones.  Once the Milestone is released, an actual Tax invoice can be created.

·         The Sales order should be setup for Order related billing , copy control between sales order and Billing document should be setup in a way that  there is no PGI Completed check when  an Invoice is created against the sales order

    • Item category setup for determination of revenue recognition. It is the item category in the sales order line item that contains the rule (service/time related) for revenue recognition. For the identified item category revenue recognition and accrual period start fields are important configuration considerations.

Revenue Recognition field controls the method of revenue recognition to be used for the sales order line item. The possible options in this case are:

–          A: Time-related revenue recognition

–          B: Service-related revenue recognition

–          D: Time related revenue recognition with a billing reference

–          No input: Revenue recognition happens along with billing (as is the normal billing scenario)

Accrual period start field controls the determination of the period from which revenue recognition gets started. The possible potions in this case are:

–          A: Accrual start date is the same as item sales contract date

–          B: Start date could be start date of milestone billing plan or periodic billing plan date

    • Proof of Delivery Activation:  Activating Proof of delivery for the Item category which is configured for Service related revenue recognition helps in recognizing partial revenue to the extent of the goods which have shipped in cases where partial delivery has been processed for a Sales order.
  1. Finance related Setup
    • Deferred Revenue account to which deferred revenue has to be posted is maintained in the “Provisional account” column in VKOA.
    • Non-billed Receivables account is setup in transaction OVUR for each customer reconciliation account used in the setup    


  1. COPA related checks

While there are no specified checks for COPA, it has been observed that with activation of SD based revenue recognition functionality at times due to SAP notes and patch level issues sales quantity otherwise flowing to COPA gets suppressed i.e it might be observed that while COPA document is created, it doesn’t contain sales quantity.

SAP Provides notes 619498 to help resolve the issue.

Functional Constraints:

Detailed functional constraints of SD based revenue recognition functionality are provided in SAP notes 678260. Any implementation of this functionality should start with a very clear understanding of its function constraints and its relevance to business. A key constraint that is noticeable about this functionality in SAP is the inability to defer COGS like revenue. This essentially means that revenue recognition has to be carried out immediately post delivery to ensure matching principle is adhered to.

Competing product Oracle R12 has introduced the functionality for COGS deferment and with growing demand for IAS18, IFRS and GAAP compliance this would possibly become a strong requirement from SAP solution as well.

Useful SAP notes:

Some useful SAP notes for quick reference are as listed below:

678260: Functional Constraints of SD based revenue recognition

779366 and 605665-: special activation guidelines from SAP

1172799: Revenue Recognition best practice

1166848: Revenue Recognition customization

Notes relevant to revenue recognition but not in EHP4:1265438,1392080, 1452022, 1489782, 1500879, 1511715, 1528295, 1529073, 1468536, 1509243

678260: Revenue Recognition with New GL

619498: Transfer of quantity and value fields

1025066: Revenue recognition by proof of delivery (POD)

532876 – FAQ: Revenue recognition process


SD based revenue recognition provides a compliant solution to revenue recognition requirements of businesses. There are some functional constraints but none too stringent or without workarounds. At the end, the functionality provides a very clear audit trail and is an accountant’s and auditor’s delight.

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      Author's profile photo Former Member
      Former Member

      Hi Sarvottam

      Nice article, very well explained, I found very few useful articles on SAP revenue recognition this is one of the best, thank you:)


      Author's profile photo Giuliano Gaudino
      Giuliano Gaudino

      Hello Sarvottam,

      very interesting article. I think that more interesting should be post a sales order as example to understand what are the characteristic that a sales order must have.


      Author's profile photo Anki Maheshwari
      Anki Maheshwari

      Very nice article Well explained. Thank you:-)

      Author's profile photo Jeevan Nilankar
      Jeevan Nilankar

      Very Nice article. My requirement is also similar kind.

      100% Advance invoice should go to deferred & once final billing is posted it should go to main G/L

      My client wants an Advance invoice for the billing plan and for Non Billing plan scenario should go to the deferred account and after the goods or service completion, it should go to the main G/L account.

      They want accounting entries should be posted as below mentioned:
      Dr AR
      Cr Deferred Revenue
      Cr VAT
      Upon delivery or service completion
      Dr Deferred Revenue
      Cr Revenue account

      Billing plan relevant Item categories they want TACO, TAMO, TANO, ZTFB, ZTXO, ZPIN, and ZPTR advance invoice should first post to deferred and at the time of final billing, it should automatically post to the main G/L account.
      and for non-billing plans relevant for item categories TAN, TAC, TAM, ZNID, ZNTD, TAX, TAW-advance invoice should first post to deferred and at the time of final billing, it should automatically post to the main G/L account.

      My client wants the advance invoice to go as a ‘noted item’ so that it should not be part of the customer’s normal SOA against the services already delivered and don’t hit the AR control account. Only Tax to be picked to VAT account.

      Can you please guide me on how we can Map the Deferred G/L and Main G/L entries in SAP so that correct accounting entries will be shown? and how down-payment invoice will get posted?