Revenue recognition: when the sale becomes revenue

Revenue recognition is the question of when money you have earned counts as revenue. Not when the invoice went out, not when the payment cleared — when the obligation you sold was actually satisfied. For a shop selling a physical item those three moments coincide and nobody thinks about it. For anything sold in advance, delivered over time, or bundled with something else, they come apart, and the difference decides which year your profit appears in.

The five-step model

IFRS 15 and ASC 606 describe the same approach in almost the same words, which is unusual and convenient.

1. Identify the contract with the customer — which may be an order, an email exchange or standard terms accepted at checkout, not necessarily a signed document.
2. Identify the performance obligations: the distinct things you promised. A licence plus implementation plus support is often three, not one.
3. Determine the transaction price, including discounts, refunds you expect to give, and anything variable.
4. Allocate the price across the obligations, normally in proportion to what each would sell for standalone.
5. Recognise revenue as each obligation is satisfied — at a point in time, or over time where the customer receives the benefit as you work.

Where revenue recognition catches small companies

• Annual subscriptions billed up front: the cash arrives in January, the revenue belongs across twelve months, and the difference sits on the balance sheet as deferred revenue.
• Setup or onboarding fees, which are usually not a separate obligation and often have to be spread rather than taken immediately.
• Milestone billing on projects, where the invoice schedule was agreed for cash-flow reasons and has no relationship to when the work is done.
• Discounts and free periods, which reduce the transaction price across the whole contract rather than only the month they fall in.
• Reseller and agency arrangements: whether you report the gross amount or only your commission turns on whether you control the goods or service before transfer, and getting this wrong overstates turnover dramatically.
• Refunds and rights of return, which reduce recognised revenue by the amount you expect to repay, not by the amount actually repaid so far.

This is the difference between profit and cash, and it is the single most common reason a growing subscription business looks profitable on the bank statement and unprofitable in the accounts. Recognising a year of subscription in the month it was billed does not make the business better; it just moves the problem into next year, where the same trick has to be repeated at a larger scale.

What to document

• The policy: how you treat each type of sale you make, written once and applied consistently.
• The obligations in your standard contract, identified once rather than reasoned from scratch each period.
• The basis for allocating price where a contract bundles things, since this is what an auditor will ask about first.
• Deferred revenue movements as part of the month-end close, reconciled rather than assumed.
• Any judgement you made and could have made differently, with the reasoning — this is the part nobody writes down and everybody needs a year later.

Where the numbers live

Ettex Books handles the ordinary side of this: invoices raised, revenue posted to the period it belongs to, and deferred balances visible rather than implied. For subscription businesses the schedule matters more than the ledger — knowing what is already billed and not yet earned is what makes the forecast honest. Ettex is not an audit tool and does not interpret accounting standards for you; where contracts bundle obligations or the amounts are material, this is a conversation with your accountant, and the standards differ in detail between IFRS and US GAAP.