What is Revenue Recognition, ASC 606 and Deferred Revenue?

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Revenue recognition is a Generally Accepted Accounting Principle (GAAP) standard that deals with how a company should handle subscription revenue.

For example, in the US, "ASC 606" is the new revenue recognition standard that aims to bring US financial reporting in line with the rest of the world.

Let's say your customer subscribes to your product in January and pays the total annual price upfront.

With Revenue Recognition, instead of an unrealistic spike appearing in January, you now have a more clear view of your revenue spread across the year. We don't recognise the full subscription payment at once but divide it into 12 monthly instalments.

Revenue Recognition helps you get an accurate view of your income and smoothes out your Monthly Recurring Revenue by splitting a subscription into portions.

When you scale your business to hundreds or even thousands of customers, keeping track of recognised revenue in spreadsheets can get really complex. Especially when there might be non-recurring sources of revenue like set-up fees or service charges.

#accounting #revenuerecognition #gaap

TIMESTAMPS:
00:00 - 00:18 What is ASC 606?
00:19 - 01:06 What is Revenue Recognition?
01:07 - 01:37 What is Deferred Revenue?
01:38 - 02:11 Why Revenue Recognition is important?