Invoice, revenue and cash: deposits and ASC 606
Northwind's customer deposit, worked from cash to delivery: why it's a liability first, when it becomes revenue, and the four ways billing and recognition can fall apart.
Revenue is recognized when the promise is kept, which for goods means when control passes to the customer. Billing and cash can come before it, after it, or on the same day. On September 26 Pinecrest Builders paid Northwind a $3,000 deposit on a $7,500 order for October delivery. Cash arrived, the goods hadn't moved, and so there was no revenue. There was a contract liability: Northwind owed Pinecrest goods. (Cash, accrual and cut-off is the accounting track's version of the same gap.)
A customer pays a $3,000 deposit for goods to be delivered in October.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 3,000.00 | |
| 2400Deferred revenue | 3,000.00 | |
| Balanced | 3,000.00 | 3,000.00 |
Cash in the bank that is not revenue. Northwind owes goods, so the credit is a liability — deferred revenue — and it stays one until October's delivery earns it.
The deposit, from the September book.
October 6: delivery, invoice and revenue together
Northwind delivers on October 6. Control passes, so the whole $7,500 is revenue that day. The deposit already covers $3,000 of it, so the invoice applies the deposit and asks for the balance, and only the balance is a new receivable.
Pinecrest's order delivered; the deposit applied on INV-1003.
| Account | Debit | Credit |
|---|---|---|
| 2400Deferred revenue | 3,000.00 | |
| 1200Accounts receivable | 4,500.00 | |
| 4000Revenue | 7,500.00 | |
| Balanced | 7,500.00 | 7,500.00 |
The other three combinations
Cash in before delivery is a liability. Revenue waits for the goods or the service, not for the invoice or the money.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 606-10-05-3, -05-4; 606-10-25-23, -25-30 (opens in a new tab)Revenue from Contracts with Customers — the core principle, and recognition when control transfersFree after registration
- ASC 606-10-45-2 (opens in a new tab)Cash taken before delivery is a contract liabilityFree after registration
- ASC 606-10-25-30 (opens in a new tab)Indicators that control of a good has passed to the customerFree after registration
- ASC 606-10-45-4 (opens in a new tab)A receivable is an unconditional right to considerationFree after registration
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Deferred revenueConsideration received, or unconditionally due, before the goods or services are transferred — a liability until the performance obligation is satisfied. ASC 606 calls it a contract liability
- Revenue recognitionDeciding when, and how much, revenue is recorded — under US GAAP, when (or as) control of a promised good or service transfers to the customer, at the consideration the entity expects to be entitled to
- Performance obligationA promise in a contract to transfer a distinct good or service, or a series of substantially the same ones — the unit revenue is recognized by
- ASC 606Topic 606, Revenue from Contracts with Customers — five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it, recognize revenue as each obligation is satisfied
- Unbilled receivableRevenue recognized where the right to payment is unconditional but the invoice has not yet been issued — a receivable, not a contract asset
- Contract assetRevenue recognized ahead of an unconditional right to payment — the right still depends on something other than the passage of time
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Order to cash (AR)The receivables stack from quote to revenue: quote → order → fulfillment → invoice → collection → cash application → revenue.
- Schedules, accruals & roll-forwardsEvery balance sheet account needs a schedule behind it, and the schedule has to tie to the GL. Most accounting products ship a ledger and statements and leave the schedules in spreadsheets. That handoff is where closes break.
- Journal entry for a customer depositWhen a customer pays a deposit, debit Cash and credit Customer deposits. On delivery, debit Customer deposits for the deposit, debit Accounts receivable for the balance, and credit Revenue for the full price.
- Journal entry for deferred revenueWhen an annual contract is invoiced up front, debit Accounts receivable and credit Deferred revenue. As each month of service is delivered, debit Deferred revenue and credit Revenue for that month's share.
- Journal entry for accrued revenueAt month-end, debit Unbilled receivables and credit Revenue for work delivered but not yet invoiced. When the invoice goes out, debit Accounts receivable and credit Unbilled receivables.
- Deferred revenue vs accrued revenueBilling or collecting ahead of the work creates deferred revenue, a liability. Doing the work ahead of the bill creates accrued revenue, an asset.
- Accrual vs deferralAn accrual recognizes revenue or expense ahead of the cash, which creates receivables and payables. A deferral parks cash that moved early on the balance sheet, as a prepaid or deferred revenue, until it's earned or used.
- 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.
- 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.
- CutoffThe line between one period and the next. Revenue and expenses land in the month they belong to, especially transactions dated just either side of month end.
- RevenueWaterfallDeferred balance recognizing by future period.
- InvoiceFormWith the revenue-recognition preview per line.