Revenue recognition
Revenue recognition is the accounting process of recording revenue in the period it is earned, which is when the goods or services have been delivered, rather than when the customer was invoiced or paid.
Also called rev rec.
ASC 606 and IFRS 15 set out the framework: identify the contract and its performance obligations, determine and allocate the transaction price, then recognise revenue as each obligation is satisfied.
Usage-based contracts make this harder than subscriptions. The amount earned in a period depends on consumption that is only known after the period closes, and prepaid credits mean cash, billing and revenue all move on different schedules.
Common questions
- When can revenue be recognised?
Revenue is recognised when the performance obligation is satisfied, meaning control of the good or service has transferred to the customer. That is independent of when the invoice was issued or when the customer paid.
- What is the difference between revenue recognition and invoicing?
Invoicing states what a customer owes and when. Revenue recognition records what the business has earned in an accounting period. The two use the same contract but answer different questions and rarely produce the same number in the same month.
- Why is revenue recognition harder for usage-based pricing?
Because the amount earned in a period depends on consumption that is only known once the period closes, and prepaid credits mean cash, billing and revenue each move on a different schedule.