Revenue recognition.
In plain English
Revenue recognition is the accounting standard that says a company records revenue when it transfers the promised good or service to the customer and earns the right to payment. The company identifies the contract, the separate promises inside it, the price, how that price splits across the promises, and then books revenue as each promise is satisfied. Cash timing does not control the answer: money collected in advance sits as deferred revenue until the work is done. Money earned but not yet billed can be recognized as revenue with a receivable on the balance sheet. Aggressive or sloppy revenue recognition is one of the most common causes of financial restatements.
01Why it matters
When you read a growth number, this rule is what decides whether it reflects delivered work or just a large prepayment that the company still owes back in service.
02The math, step by step
Say a gym sells a 600 dollar annual membership on January 1 and collects it all that day. It recognizes 50 dollars a month (600 divided by 12). After three months, 150 dollars has become revenue and 450 dollars is still deferred revenue sitting on the balance sheet as a liability.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Getting paid is not recognizing revenue. A company can hold a million dollars of customer cash and report almost no revenue from it, because the service has not been delivered. That gap lives in deferred revenue, and reading it tells you how much work is still owed.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice