Revenue recognition is a set of accounting principles that determine when a business can treat payments from its customers as revenue. This depends on several factors, among them when the goods or services have been provided. The ChartMogul revenue recognition product is useful for finance teams to help them prepare monthly and annual income statements and balance sheets.
GAAP (Generally Accepted Accounting Principles) - Vary by country but most people refer to US GAAP.
FASB (Financial Accounting Standards Board) - A Standard setting body that issues guidelines.
ASC 606 - Accounting Standards Codification related to revenue recognition.
Balance sheet - Has two sides - one reflects assets, the other liabilities & equity.
Income statement - Reflects the results of a period by showing revenue and expenses a company incurred.
Recognized Revenue - this is commonly only referred to as revenue and reflected in the income statement. Payments that fulfil the five criteria below can be considered recognized revenue.
Deferred Revenue - relates to payments that have been received by the company, but for which goods or services have not yet been provided. It is reflected as a liability on the balance sheet because the company is still liable to provide these goods or services.
Principles of Revenue Recognition
According to the ASC 606 as defined by the FASB, revenue can be recognized from a payment if:
- Risks and rewards have been transferred from the seller to the buyer
- The seller has no control over the goods sold
- Collection of payment is reasonably assured
- The amount of revenue can be reasonably measured
- Costs of earning the revenue can be reasonably measured
ChartMogul helps with the first principle as revenue can be recognized under the assumption that services will be rendered over time once a payment has been made. However, limitations apply if no continuous service is provided.