ASC 980-20: Cost of Service Revenue Journal Entries

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Accounting Standards Codification (ASC) 980-20, Regulated Operations - Measurement Focus, provides guidance on the accounting for revenue recognition in the context of cost of service regulation. This standard is crucial for entities operating in regulated industries, such as utilities and telecommunications, where rates are set by regulatory authorities. In this article, we will discuss the key aspects of ASC 980-20 and provide examples of journal entries to illustrate the accounting treatment of cost of service revenue recognition transactions.
 

ASC 980-20 Overview

ASC 980-20 applies to entities operating in regulated industries that are subject to cost of service regulation. The guidance addresses various aspects of accounting for cost of service revenue recognition, including:
 

1. Recognition of revenues and expenses
 

2. Accounting for regulatory assets and liabilities
 

3. Disclosures related to regulated operations
 

Recognition of Revenues and Expenses

Under cost of service regulation, an entity's rates are determined by regulatory authorities to ensure that the entity recovers its costs and earns a reasonable return on its investment. ASC 980-20 requires that revenues and expenses be recognized in the financial statements based on the rates authorized by the regulatory authorities.
 

Journal Entries

To illustrate the accounting treatment under ASC 980-20, let's consider a simplified example. A utility company provides electricity to customers and incurs $900,000 in operating expenses, $100,000 in depreciation, and $500,000 in interest expense during a reporting period. The regulatory authority allows the utility company to earn a return of $1,000,000 on its investment. The utility company bills customers based on the authorized rates.
 

1. Recognition of operating expenses:

Operating Expense $900,000

Accounts Payable $900,000
 

2. Recognition of depreciation:

Depreciation Expense $100,000

Accumulated Depreciation $100,000
 

3. Recognition of interest expense:

Interest Expense $500,000

Interest Payable $500,000
 

4. Recognition of revenues:

Assuming the utility company bills customers based on the authorized rates, the total revenue recognized would be the sum of the allowed expenses and the authorized return:
 

Total Revenue = Operating Expenses + Depreciation + Interest Expense + Authorized Return

Total Revenue = $900,000 + $100,000 + $500,000 + $1,000,000

Total Revenue = $2,500,000
 

The journal entry to recognize the revenue would be:

Accounts Receivable $2,500,000

Regulated Revenue $2,500,000

 

ASC 980-20 provides a comprehensive framework for accounting for cost of service revenue recognition in regulated industries. By recognizing revenues and expenses based on the rates authorized by the regulatory authorities, entities operating in regulated industries can ensure accurate financial reporting and maintain compliance with accounting standards. The journal entries provided in this article offer a clear understanding of the application of ASC 980-20, enabling stakeholders to better comprehend the intricacies of cost of service revenue recognition transactions.