ASC 606 is the US GAAP rule for when a company records revenue: when it delivers what it promised to a customer, in the amount it expects to receive. For a subscription that means revenue arrives month by month as the service is delivered, whenever the cash comes in.
The short answer
- Recognize revenue as you deliver, whatever the date of the invoice or the payment. A 12-month subscription paid up front becomes revenue over the 12 months.
- Cash received ahead of delivery sits on the balance sheet as deferred revenue (the standard calls it a contract liability) until you earn it.
- Work delivered before you bill for it is revenue now, with a receivable or contract asset on the balance sheet.
- Anyone who needs GAAP financials follows it: audited statements, most investor reporting and diligence, and acquirers. A company on the cash method does not apply it.
The five steps
The standard is one model applied in five steps. Most startup contracts are simple enough that each step takes a minute, and the steps with real judgment are the second and the fourth.
- 1
Identify the contract
An agreement with a customer that creates enforceable rights and obligations, where payment is likely. For most startups this is the order form, the subscription terms or the statement of work.
- 2
Identify the performance obligations
List each distinct thing you promised: access to the software, an implementation, training, support, a managed service. A promise is separate when the customer can benefit from it on its own and it can be separated from the other promises in the contract.
- 3
Determine the transaction price
The amount you expect to receive. Start with the contract price, then adjust for discounts, credits and refunds you expect to give, and for amounts that depend on usage or results.
- 4
Allocate the price to each performance obligation
With one obligation, it all goes there. With several, split the price in proportion to what each would sell for on its own. A discount on a bundle is spread across the pieces.
- 5
Recognize revenue as each obligation is satisfied
Over time for a service the customer receives and uses as you provide it, such as a subscription. At a point in time for something delivered once, such as a finished report or a go-live. This step sets the monthly numbers.
A worked example: an annual subscription paid up front
A customer signs on March 1 and pays $12,000 for 12 months of access. There is one performance obligation, the access, delivered evenly across the year, so the $12,000 is recognized in equal parts: $1,000 a month.
| Date | What happens | Entry | Deferred revenue balance |
|---|---|---|---|
| March 1 | Customer pays $12,000 | Debit cash 12,000. Credit deferred revenue 12,000. | 12,000 |
| March 31 | One month delivered | Debit deferred revenue 1,000. Credit subscription revenue 1,000. | 11,000 |
| April 30 | Second month delivered | Debit deferred revenue 1,000. Credit subscription revenue 1,000. | 10,000 |
| May 31 | Third month delivered | Debit deferred revenue 1,000. Credit subscription revenue 1,000. | 9,000 |
Cash accounting would show $12,000 of revenue in March and nothing in the next eleven months. Here the $12,000 reaches the income statement at $1,000 a month, and the balance sheet shows how much service you still owe the customer.
A second example: a subscription plus an implementation fee
The same customer also pays a $2,000 one-time setup fee. Whether that fee is revenue at go-live or revenue across the year depends on step two: is the setup a separate promise, or part of getting access?
| Setup is distinct (a separate promise) | Setup is part of the access | |
|---|---|---|
| When the $2,000 is recognized | At go-live, when the setup is delivered | Across the 12 months, with the subscription |
| Revenue in the go-live month | $3,000 ($2,000 setup plus $1,000 subscription) | $1,167 ($14,000 divided by 12) |
| Revenue over the 12 months | $14,000 | $14,000 |
| Typical case | The customer or another vendor could do the setup, and it has a price of its own | The setup only makes the software usable and has no value alone |
Both conclusions can be correct for different companies. What matters is that you reach the conclusion on the facts, apply it the same way each time, and keep the reasoning on file. An auditor will ask for it.
How common situations change the timing
- Monthly billing in arrears
- Revenue is earned during the month and invoiced after it. At month end you have earned revenue you have not billed yet, which sits as unbilled revenue (a contract asset).
- Multi-year prepayment
- The deferred revenue balance is larger and runs longer. The part to be earned in the next 12 months is current, and the rest is long-term.
- Free months and discounts
- A free month is part of the price of the whole term, so the total price is spread across the term.
- Usage-based fees
- Revenue is generally recognized as the usage occurs. A minimum commitment is recognized over the period it covers.
- Refunds and credits
- A refund or credit note reduces revenue, and any deferred part is released against it. Estimate the ones you expect to give when you set the price.
- Upgrades and mid-term changes
- A change to scope or price is a contract modification. Depending on the change, the unrecognized balance is re-spread over the remaining term or the change is accounted for as a new contract.
- Fixed-fee projects
- Revenue follows progress, such as milestones or hours completed. Time-and-materials work is revenue as the hours are delivered.
- Sales commissions
- Governed by a related standard, ASC 340-40. Commissions that are incremental to winning a contract are generally capitalized and expensed over the period they benefit. A practical expedient lets you expense them right away when that period is a year or less.
The three balance sheet accounts that carry it
| Account | What it holds | Example |
|---|---|---|
| Deferred revenue (contract liability) | Cash or an invoice for service you have not delivered yet | The $9,000 left after May 31 in the first example |
| Accounts receivable | An amount a customer owes you for work already delivered and invoiced | An invoice sent in March for March service, unpaid |
| Unbilled revenue (contract asset) | Revenue earned but not yet invoiced | Usage in the last week of the month, billed on the 5th |
Billings and revenue are different numbers, and the gap between them is the change in deferred revenue: billings for a month equal revenue plus the increase in deferred revenue. A growing company with annual prepayments shows billings ahead of revenue.
Why it matters before you are audited
- Investors read revenue and ARR from it. An annual contract booked as one month of revenue overstates that month and understates the rest.
- Margins and burn depend on it. Gross margin only makes sense when the revenue and the cost of delivering it fall in the same period.
- Diligence checks the schedule. A buyer or investor asks for a deferred revenue rollforward that ties to the balance sheet, and rebuilding it later takes much longer than keeping it current.
- Auditors test the judgments. The performance obligation and allocation conclusions are the first thing they ask to see.
Common mistakes
- Recognizing the full invoice when it is sent or paid.
- Skipping a revenue schedule for a contract that covers more than one month.
- Treating a start-up fee as revenue at signing before the work is delivered.
- Using a different start-day convention for different customers.
- Letting the deferred revenue balance drift from the contract schedules with no monthly tie-out.
- Forgetting credits and refunds, which reduce revenue and the remaining deferral.
- Keeping no written conclusion for the judgment calls.
How Numbrr handles it
On Numbrr One and above, annual and multi-month contracts are held in deferred revenue and recognized monthly, on a straight-line or day-prorated basis, with a schedule for each contract. Numbrr produces an ASC 606 report and a deferred revenue schedule from the contracts you enter. Starter keeps accrual-basis books without revenue recognition. See how it works.
The judgment calls stay with you and your CPA: whether a setup fee is a separate promise, how a bundle is allocated, and how to treat a modification. Numbrr records and schedules the result. Numbrr works for US companies in US dollars. For the broader switch to accrual books, read cash vs accrual accounting for startups.
What is ASC 606 in simple terms?
ASC 606 is the US GAAP standard for recognizing revenue. A company records revenue when it delivers the goods or services it promised, in the amount it expects to receive. For a subscription, revenue is recognized over the term as the service is delivered, whenever the customer pays.
What are the five steps of ASC 606?
Identify the contract with the customer, identify the performance obligations in it, determine the transaction price, allocate the price to each performance obligation, and recognize revenue when or as each obligation is satisfied.
How do you recognize revenue on an annual SaaS subscription paid up front?
Record the payment as deferred revenue, then recognize it in equal parts over the months of service. A $12,000 contract paid on March 1 is $1,000 of revenue each month, with the unearned balance shown as deferred revenue on the balance sheet.
Is a one-time implementation fee recognized up front?
It depends on whether the setup is a separate promise. If the customer could benefit from it alone, it is usually recognized when delivered. If it only makes the software usable, it is recognized over the subscription term. Make the call on the facts, apply it consistently and write down the reasoning.
Do early-stage startups have to follow ASC 606?
Companies that issue GAAP financial statements, such as audited statements or statements for investors, lenders or an acquirer, follow it. A company that keeps cash-basis books for its own use does not apply it, though many early companies adopt it when they move to accrual books before raising a round.
What is the difference between deferred revenue and unbilled revenue?
Deferred revenue is cash or an invoice for service you have not delivered, a liability. Unbilled revenue is revenue you have earned and not yet invoiced, an asset. They sit on opposite sides of the timing between delivery and billing.
Does Numbrr support ASC 606 revenue recognition?
Yes, from Numbrr One. It holds annual and multi-month contracts in deferred revenue, recognizes them monthly with a schedule for each contract, and produces an ASC 606 report and a deferred revenue schedule. Judgment calls about performance obligations stay with you and your CPA.