Revenue recognition
Revenue recognition
Revenue
The accounting rule for when revenue counts as earned. For prepaid subscriptions, revenue is recognized as each delivery ships, not when the cash arrives.
What is Revenue recognition?
Under accrual accounting, revenue is recorded when you deliver what the customer paid for. In the US the standard is ASC 606, and internationally it is IFRS 15. Both say revenue is recognized as performance obligations are satisfied.
For subscriptions, cash collected upfront for future deliveries is recorded as deferred revenue, a liability, and moved into revenue as each order ships or each period of access passes. This keeps your income statement in line with what you actually delivered. Your accountant can confirm how the rules apply to your business.
Example
For example, a customer prepays $120 for 12 monthly deliveries. The brand recognizes $10 of revenue each month as each order ships. After three deliveries, $30 is recognized revenue and $90 is still deferred.
Why Revenue recognition Matters
Recognizing prepaid revenue correctly avoids overstating profit in the month you collect the cash.
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