Journal Entry Illustrations – Transaction Price Allocation and Contract Modifications

Executive Summary

This section complements the earlier whitepapers on Transaction Price Allocation (Step 4) and Contract Modifications under ASC 606 and IFRS 15 by providing end-to-end journal entry illustrations. The objective is to translate allocation and reallocation concepts into concrete accounting entries, covering:

• Normal transaction price allocation at contract inception
• Revenue recognition over time
• Accounting impact of each contract modification model

The illustrations are intentionally generic and standards-aligned, avoiding system-specific behavior, while reflecting how modern revenue subledgers typically operate.

Part A – Journal Entries for Normal Transaction Price Allocation (No Modification)

Scenario A1: Multiple Performance Obligations – Relative SSP Allocation

Contract Terms

• SaaS Subscription (1 year)
• Implementation Service (one-time)
• Total Contract Price: $120,000

Standalone Selling Prices (SSP)

• SaaS Subscription SSP: $100,000
• Implementation SSP: $50,000
• Total SSP: $150,000

Relative Allocation

• SaaS Allocation: (100,000 / 150,000) × 120,000 = $80,000
• Implementation Allocation: (50,000 / 150,000) × 120,000 = $40,000

Entry 1: Billing Event (AR / Deferred Revenue)

Dr. Accounts Receivable …………… 120,000
Cr. Contract Liability (Deferred Revenue) …. 120,000

Entry 2: Performance Obligation Satisfaction – Implementation (Point in Time)

Dr. Contract Liability (Deferred Revenue) …. 40,000
Cr. Revenue – Implementation ………. 40,000

Entry 3: Performance Obligation Satisfaction – SaaS (Over Time, Monthly)

Monthly Revenue = 80,000 / 12 = 6,667

Dr. Contract Liability (Deferred Revenue) …. 6,667
Cr. Revenue – SaaS Subscription …….. 6,667

Part B – Journal Entries for Contract Modification Models

Model 1: Separate Contract (No Reallocation)

Scenario B1: Add-On at Standalone Selling Price

Original Contract

• SaaS Subscription: $120,000

Modification

• Advanced Module added for $30,000
• SSP of module = $30,000

Entry 1: Billing for Add-On (Separate Contract)

Dr. Accounts Receivable …………… 30,000
Cr. Contract Liability – Add-On ……. 30,000

Entry 2: Revenue Recognition for Add-On

(Over service period)

Dr. Contract Liability – Add-On ……. XX,XXX
Cr. Revenue – Add-On ……………… XX,XXX

Key Point: Original contract allocations and revenue remain unchanged.

Model 2: Prospective Modification (Termination + New Contract)

Scenario B2: Upgrade with Discounted Pricing

Original Contract

• 2-year SaaS: $240,000
• Year 1 revenue recognized: $120,000

Modification at End of Year 1

• Upgrade for remaining year
• Additional consideration: $40,000

Revised Remaining Transaction Price

• Unrecognized original: $120,000
• Modification price: $40,000
• Total remaining: $160,000

Entry 1: No Adjustment to Prior Revenue

(No journal entry – prior revenue stands)

Entry 2: Reallocation of Remaining Consideration (Prospective)

Dr. Contract Liability (Revised) ……. 160,000
Cr. Revenue – SaaS (future periods) … 160,000

(Recognized over remaining service period)

Key Point: No reversal of previously recognized revenue.

Model 3: Retrospective Modification (Cumulative Catch-Up)

Scenario B3: Scope Reduction in Continuous Service

Original Contract

• 3-year service: $300,000
• Revenue recognized after Year 1: $100,000

Modification

• Total consideration reduced to $240,000

Revised Cumulative Revenue After Year 1

• 240,000 / 3 × 1 year = $80,000

Overstatement

• 100,000 – 80,000 = $20,000

Entry 1: Cumulative Catch-Up Adjustment

Dr. Revenue – Service …………….. 20,000
Cr. Contract Liability (or Contract Asset) … 20,000

Entry 2: Future Revenue Recognition

Remaining revenue allocated based on revised total consideration and remaining service period.

Part C – Modification Introducing Variable Consideration

Scenario B4: Bonus Added Mid-Contract (Prospective)

• Bonus added: $50,000
• Included only if constraint satisfied

Entry When Constraint Is Met

Dr. Contract Asset / AR …………… 50,000
Cr. Revenue – Variable Consideration .. 50,000

Part D – Summary Mapping

Scenario	Revenue Adjustment	Allocation Impact
Normal allocation	None	Initial SSP-based allocation
Separate contract	None	New allocation only
Prospective modification	Forward-only	Remaining consideration reallocated
Retrospective modification	Catch-up	Full reallocation

Conclusion

Journal entries bring allocation theory into operational reality. Under ASC 606 and IFRS 15:

• Allocation drives revenue, not billing
• Modification classification dictates whether entries are prospective or retrospective
• Cumulative catch-up entries are required only when goods or services are not distinct

Organizations that clearly align allocation logic with journal entry mechanics ensure consistency between contractual economics, subledger processing, and financial reporting.