Basic Concepts
In a nutshell: Revenue is recorded when goods or services are delivered, following a clear five-step process.
## When Is Revenue Really Earned?
Revenue recognition is all about when to record sales and income in the books. It’s not as simple as just counting cash received! Accountants follow the five-step model from ASC 606 to decide when revenue should be recognized.
### The Five-Step Model
1. Identify the contract with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue when (or as) the performance obligations are satisfied.
## Why It Matters
Correctly recognizing revenue ensures that financial statements are accurate and not misleading. It prevents companies from inflating their results by recording sales too early.
## Real-World Scenario
If a company delivers a product in January but gets paid in February, revenue is recognized when the product is delivered—not when cash is received.
Examples
- A software company recognizes revenue over the contract period as it provides ongoing support to its customers.
- A retailer records revenue when the customer takes home a purchased item, not when the cash is deposited.