Revenue Recognition
Accounting rules for when revenue should be recorded in financial statements.
Definition
Revenue recognition determines when you record revenue in your books. Under current standards (ASC 606), you recognize revenue when you transfer control of goods or services to the customer—typically when delivered, not when invoiced or paid.
For services over time (like monthly subscriptions or long projects), revenue is recognized as you perform the service. For product sales, revenue is typically recognized when shipped or delivered.
Why It Matters
Proper revenue recognition ensures financial statements accurately reflect business performance. Recognizing revenue too early overstates current period results; too late understates them.
SaaS companies must defer revenue for annual prepayments, recognizing 1/12 monthly. Construction companies use percentage-of-completion to recognize revenue as projects progress. Incorrect revenue recognition can violate GAAP and mislead stakeholders.
Examples
- 1
Annual SaaS subscription $12,000 paid upfront in January—recognize $1,000 revenue each month for 12 months.
- 2
Construction project billed $100,000 upfront, completed over 6 months—recognize $16,667/month based on completion percentage.
- 3
Product shipped December 31, invoice sent January 2—revenue recognized in December (when shipped).
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