Revenue recognition
Revenue recognition is the accounting decision about when revenue counts as earned and appears in the income statement. Under accrual accounting it is recorded as goods or services transfer to the customer, at the amount the seller expects to be entitled to, which is often long before or long after the cash moves.
Cash arriving and revenue counting are separate events, and accrual accounting exists precisely to keep them apart. A customer who prepays twelve months of service on 1 April has handed over the money and received almost nothing. Recognising all of it in April would say the seller earned a year's revenue in a month where it delivered one month of work, so the standards do the opposite: the obligation is satisfied month by month, and the revenue follows the delivery. The unearned remainder sits on the balance sheet as deferred revenue, which is a liability, because the seller still owes the customer eleven months of something.
The current model, set out in ASC 606 in the US and in IFRS 15 internationally, runs in five steps. Identify the contract with the customer. Identify the distinct performance obligations inside it. Determine the transaction price. Allocate that price across the obligations. Recognise revenue as each obligation is satisfied. Most of the difficulty in practice lives in steps two and four, because a single order frequently bundles things that transfer at different times: hardware delivered on day one, a twelve-month service commitment, an implementation project, a discount applied across all three. Splitting one invoice into obligations with separate timing is what turns a simple sale into a two-week accounting exercise.
This matters to a commission plan because recognised revenue is one of the candidate triggers, and it is usually the wrong one to pay against on its own. It is the number finance trusts, it reconciles to the accounts, and it spreads a single sale across twelve pay runs, which delays a rep's reward until the connection between the work and the money is thin. Plans that use it typically pair it with something faster, or accept the delay deliberately because the credit risk warrants it.
The other reason to understand the mechanism is that it explains the questions finance asks about deals that reps consider finished. Whether a service has transferred, whether a contract modification creates a new obligation, whether a variable fee should be constrained until the uncertainty resolves: these are the judgements that decide the timing, and they are judgements rather than lookups. Commish calculates what a plan owes and records how it got there. Which period the underlying revenue belongs in is settled by the people who close the books.
A prepaid annual contract across two calendar years
A customer signs a twelve-month service contract on 1 April and pays the full $120,000 upfront. The service is delivered evenly across the term, so one performance obligation is satisfied month by month.
- Contract value, twelve months from 1 April
- $120,000
- Cash received in April
- $120,000
- Revenue recognised each month
- $10,000
- Recognised by 31 December, nine months in
- $90,000
- Deferred revenue carried at 31 December
- $30,000
- April cash against April revenue
- $120,000 against $10,000
A plan paying on recognised revenue pays this deal across twelve runs and finishes in March of the following year. A plan paying on booking pays the whole thing in April, before the seller has delivered anything.
Paying commission on a number that can be restated
Recognised revenue moves. A contract modification reallocates the transaction price, an obligation turns out to have transferred later than assumed, or an auditor disagrees about a bundled implementation and pushes revenue into a different quarter. None of that is unusual, and every instance of it changes a figure that was already used to pay somebody. A plan tied directly to the recognition schedule inherits every restatement as a clawback or a true-up on a paycheck, which is a hard conversation to have about arithmetic the rep cannot see. Naming a stable trigger, and reconciling to recognition separately, keeps the accounting judgement out of the rep's pay.
- When is revenue recognised?
- When control of the promised goods or services transfers to the customer, at the amount the seller expects to be entitled to in exchange. For a product that is usually delivery; for a subscription or service it is generally spread across the period the service is provided; for a project it may track progress toward completion. The cash payment date is a separate matter and often falls in a different period entirely.
- What is the difference between revenue recognition and cash accounting?
- Cash accounting records revenue when money is received and expenses when money is paid. Accrual accounting, which revenue recognition standards govern, records revenue when it is earned and expenses when they are incurred, regardless of when cash moves. A prepaid annual contract produces one month of revenue and eleven months of deferred revenue under accrual, against a full year of revenue in one month under cash.
Nearby terms
Knowing the word is
the easy half
Commish pays revenue recognition the way your plan describes it, shows the arithmetic on every line, and traces each payment back to the deal that earned it.