Definition
Revenue recognition is the accounting principle that decides when income is recorded in a business's books. Under accrual accounting, revenue is recognized when it is earned, meaning goods or services have been delivered, not when the invoice is sent or the cash arrives. Prepaid amounts are recorded as deferred revenue until earned.
Also called: Revenue recognition principle, ASC 606, IFRS 15
Revenue recognition in practice
For many small businesses, delivery and invoicing happen close together, so the invoice date is a fair proxy. The difference matters when you bill in advance, such as annual subscriptions or retainers, or bill in arrears for long projects.
Larger companies follow formal standards, ASC 606 in the US and IFRS 15 internationally. Both use a five-step model: identify the contract, identify the performance obligations, set the price, allocate the price to each obligation, and recognize revenue as each obligation is satisfied.
Businesses using cash-basis accounting recognize revenue when payment is received, which is simpler but gives a less accurate picture of performance in each period.
Example
A software company invoices $12,000 on January 1 for a one-year subscription. It recognizes $1,000 of revenue each month and records the rest as deferred revenue.
Frequently Asked Questions
Is revenue recognized when I send an invoice?
Under accrual accounting, revenue is recognized when it is earned, which is often but not always the invoice date. Under cash accounting, it is recognized when you are paid.
Do small businesses need to follow ASC 606?
Private companies that issue GAAP financial statements do, but many very small businesses use cash or tax-basis accounting instead. Ask your accountant which applies to you.
Related terms
- Deferred revenue Deferred revenue is money a business has received, or invoiced, for goods or services it has not yet delivered.
- Accrued revenue Accrued revenue is income a business has earned by delivering goods or services but has not yet invoiced.
- Accrual basis Accrual basis accounting records revenue when it is earned and invoiced, and expenses when they are incurred, regardless of when cash changes hands.
- Cash basis Cash basis accounting records revenue when payment is actually received and expenses when they are actually paid.
- Billing in advance Billing in advance means invoicing a client before the service period begins, so payment arrives at or before the time the work is delivered.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.