What it means
ASC 606 is the US GAAP standard for revenue, the money a company earns by selling to customers. The core idea is that you record revenue as you hand over what the customer bought, at the amount you expect to be paid. Sending the invoice doesn't create revenue, and neither does receiving the cash.
"Recognize" is accounting's word for putting an amount into the financial statements. Revenue recognition is simply the question of when revenue shows up on the P&L, and how much.
The standard runs in five steps. Identify the contract. Identify each distinct promise in it, called a performance obligation, such as software access and a separate training package. Work out the price after discounts and credits, then allocate it across the promises. Finally, recognize each piece as it's delivered, either at a point in time or over a period.
A subscription is delivered evenly, so its revenue is spread evenly across the term. Anything invoiced ahead of delivery waits on the balance sheet as deferred revenue.
On January 1 Acme invoices $12,000 for a non-cancellable one-year plan, due on receipt. Because the contract can't be cancelled and payment is due, Acme already has a right to the money. It records a $12,000 receivable and $12,000 of deferred revenue. Revenue so far is zero.
On January 31 one month of service has been delivered, so $1,000 moves from deferred revenue to revenue. The same happens every month through December. When the customer pays, cash goes up and the receivable goes away, and revenue doesn't change at all.
ASC 340-40 is the companion standard for the cost of winning a contract, such as sales commissions. ARR is an operating metric and won't match GAAP revenue month to month. Diligence teams usually ask for both, with a bridge between them.
Why it matters. A $12,000 annual plan billed in January is $1,000 of revenue a month for twelve months. Book it all in January and your monthly revenue, growth rate and margins get restated in diligence.
Try it with your numbers
Change any number. The working below updates as you type.
Allocated price = Transaction price × (Standalone price of the promise ÷ Sum of standalone prices)What the customer pays, after discounts and credits.
Allocated to software access
$9,600.00
How it’s worked out
- 1Sum of standalone prices$12,000.00 + $3,000.00$15,000.00
- 2Software access$12,000.00 × $12,000.00 ÷ $15,000.00$9,600.00
- 3Training package$12,000.00 × $3,000.00 ÷ $15,000.00$2,400.00
- 4Software revenue each month$9,600.00 ÷ 12$800.00
| Promise | Standalone price | Allocated | Recognized |
|---|---|---|---|
| Software access | $12,000.00 | $9,600.00 | Over 12 months |
| Training package | $3,000.00 | $2,400.00 | When delivered |
| Total | $15,000.00 | $12,000.00 |
The bundle is $3,000.00 cheaper than buying each piece alone, so the discount is shared in proportion to standalone price.
The entry, worked
On January 1 Acme invoices a customer $12,000 for a non-cancellable one-year subscription, due on receipt. No service has been delivered yet.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | $12,000.00 | |
| Deferred revenue | $12,000.00 | |
| Total | $12,000.00 | $12,000.00 |
The contract can't be cancelled and payment is due, so Acme books the receivable now against deferred revenue, which becomes revenue at $1,000 a month.
Common questions
When do I recognize revenue for a monthly SaaS subscription?
Over the month the service is provided. For a monthly plan billed at the start of the month, that usually means revenue in the month it's billed.
Is a setup fee revenue on day one?
Usually not. If the setup doesn't give the customer a separate service, the fee is combined with the subscription and recognized over the period the customer benefits.
Does ARR come from ASC 606?
No. ARR is an operating metric, not a GAAP measure. GAAP revenue and ARR often differ, and investors look at both.
Where it comes up
The glossary entries, founder guides and lessons on this site that use the term and link here.
- RevenueInflows or enhancements of assets, or settlements of liabilities, from delivering goods or services — recognized when control transfers, not when cash arrivesGlossary
- US GAAP for early-stage startups, in plain EnglishAccrual accounting, revenue recognition (ASC 606), leases (ASC 842), stock compensation and capitalized software: what each means for a small company.Guide · 4 min
- Deferred revenue for SaaS startups, explainedAn annual prepayment is cash today and revenue over a year. How deferred revenue works under ASC 606, why it’s a liability, and the schedule behind it.Guide · 4 min
- How to read an income statement (P&L)Revenue, cost of revenue, gross margin, operating expenses and net income, read line by line, on accrual basis, with the mistakes founders make most.Guide · 7 min
- Balance sheet explained for startupsAssets equal liabilities plus equity. What each startup line means, from deferred revenue to the SAFE and the accumulated deficit, and why it must balance.Guide · 7 min
- MRR vs GAAP revenue under ASC 606MRR and ARR are operating metrics; revenue under ASC 606 is earned over time. How annual prepayments and churn split them, and how to reconcile the two.Guide · 6 min
- What to put on an invoice: a field-by-field guideThe fields a B2B invoice needs to get paid on time: legal names, a numbering sequence, dates, terms, tax lines, PO and remit-to, and how to fix one.Guide · 7 min
- Payment terms explained: Net 30, discounts and late feesHow to choose payment terms, count a due date, price an early-payment discount, set lawful late fees and work with enterprise procurement.Guide · 6 min
- Bad debt and write-offs: allowance vs direct methodHow to book a customer who won’t pay: the GAAP allowance under ASC 326, the direct write-off the IRS requires, and what to do if the money comes back.Guide · 7 min
- SaaS revenue recognition under ASC 606, step by stepASC 606’s five steps applied to a startup SaaS contract: annual prepay, implementation fees, usage and multi-year deals, with the entries.Guide · 6 min
- Accounts, and the five typesEvery account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.Lesson 3
- Recording the monthThirteen things happened to Northwind in September. Here is every one of them turned into an entry, with the reasoning that produced it.Lesson 5
- The income statementTwo of the five account types, arranged so each subtotal answers a different question about how the month went.Lesson 10
- Closing the monthStatements are not the end. The close proves every balance against something outside the ledger, then locks the period so the numbers can't quietly change.Lesson 13
Read further
General information for US companies, not tax, legal or accounting advice. Check the specifics with a CPA before you act on them.