Glossary
Revenue recognition
The accounting rules for when revenue counts as earned and can be recorded, which is often not when cash is received.
Revenue recognition determines when a company is allowed to record revenue on its financial statements, based on when it has actually delivered the goods or services it was paid for, not simply when an invoice is sent or cash arrives. Under the principal frameworks used in practice, ASC 606 in US GAAP and the closely aligned IFRS 15, revenue is recognized as performance obligations are satisfied, which for a one-year software subscription typically means recognizing an even portion of the contract value each month of service.
This is why recognized revenue and cash collected often diverge: a customer who prepays for a year creates deferred revenue, a liability, on day one, which is drawn down into recognized revenue over the following months. Revenue recognition also differs from bookings, billings, and revenue concepts like bookings, the signed contract value, which is not itself a recognized revenue figure and can materially overstate near-term revenue if treated as one.
Revenue recognition matters because it is what auditors and regulators hold companies to, and it determines the top-line figure reported in financial statements finalized during financial close. A common pitfall is confusing recognized revenue with annual recurring revenue, an unaudited run-rate metric; the two are related but governed by different rules and rarely equal each other in any given period.
Last reviewed September 22, 2026