What is Revenue Recognition?
Definition
The accounting principle determining when subscription revenue should be recorded on financial statements.
Understanding Revenue Recognition
Revenue recognition in subscription businesses follows specific accounting rules (ASC 606). When a customer pays $120 for an annual subscription, the business cannot recognize all $120 as revenue immediately. Instead, $10 is recognized each month as the service is delivered.
The unrecognized portion is recorded as 'deferred revenue' — a liability on the balance sheet. This matters for understanding subscription company financials and explains why fast-growing subscription companies can appear unprofitable despite strong bookings. For consumers, understanding this helps evaluate the financial health of your subscription providers.
Related Terms
Recurring Revenue
Income that a business can reliably expect to receive at regular intervals from active subscriptions.
ARR
Annual Recurring Revenue — the annualized value of recurring subscription revenue, calculated as MRR multiplied by 12.
Subscription
A recurring payment arrangement where a customer pays at regular intervals to access a product or service.
Deferred Revenue
Payment received for subscription services that have not yet been delivered, recorded as a liability until the service is provided.