Revenue recognition

What is revenue recognition?

Revenue recognition is an accounting rule that defines when a business should record income from a sale. In most cases, revenue is recognized when the product or service has been delivered to the customer, not necessarily when the payment is received.

This principle ensures that revenue is reported at the right time, aligning it with when it’s actually earned. It helps businesses present a more accurate picture of their financial performance, which is especially important for subscriptions, retainers, or long-term service agreements.

Why is revenue recognition important?

Proper revenue recognition maintains financial transparency, helps meet compliance requirements, and enables stakeholders to evaluate a company’s performance accurately. It also avoids misleading overstatements of income.

The five-step revenue recognition model

• Identify the contract with a customer
• Identify performance obligations
• Determine the transaction price
• Allocate the price to obligations
• Recognize revenue when each obligation is fulfilled

Example of recurring recognition

A SaaS company offering an annual subscription should not recognize the entire payment upfront. Instead, it spreads the revenue monthly over the 12-month period.

Driftcharge Tip

Ensure your accounting software or ERP supports automated revenue recognition workflows, especially if you’re managing complex contracts or recurring billing.

Ganesh Pawar

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Ganesh Pawar is the founder of Driftcharge, a subscription management app designed to help Shopify merchants streamline and scale their subscription businesses. With a deep focus on solving real-world pain points—like legacy account page support, flexible subscription options, and advanced analytics—Ganesh is passionate about building tools that drive growth and retention.