Accruals & Timing
Revenue Recognition
The rule for when revenue officially counts: when you've delivered what the customer agreed to buy, not when cash arrives.
Revenue recognition decides the moment revenue is real on your books. Under GAAP's core principle (ASC 606), you recognize revenue when you satisfy a performance obligation — when the good is delivered or the service period has been provided — not when an invoice is sent or cash is collected. The five steps: identify the contract, identify the obligations, determine the price, allocate it across obligations, and recognize as each obligation is satisfied.
This is the single highest-stakes judgment in startup accounting, because revenue is the number everything else is measured against. Annual subscriptions get spread monthly. Bundled contracts (implementation + subscription) get split. Usage-based components get estimated. Get it wrong and the misstatement flows into the P&L, the balance sheet, taxes, and your board deck — which is why revenue recognition errors are a material finding in audits and why 'we booked it when they paid' is never a defense.
Example
A customer signs a two-year deal: $60,000 for a $20,000 implementation and 24 months of service for $80,000 — total $100,000, paid up front. The implementation recognizes when completed (month 1); the subscription recognizes at $3,333/month across 24 months. Cash lands entirely in month 1; revenue deliberately does not.
Common questions
Can I recognize revenue when the customer pays me?
Only if you've also delivered what you sold at that moment. For anything with a delivery period — subscriptions, retainers, projects — cash payment alone doesn't earn the revenue. Recognizing up-front cash as instant income inflates early results and sets up a cliff.
Why does deferred revenue exist?
It's the direct consequence of correct revenue recognition: cash received before the performance obligation is satisfied sits as a liability until delivery happens. Deferred revenue is the balance-sheet mirror of revenue you haven't earned yet.
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