# 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.

Source: https://lopifi.com/learn/customer-deposits-and-revenue-recognition
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**Is a customer deposit revenue, and when do I recognize revenue under 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](https://lopifi.com/md/glossary/performance-obligation) 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](https://lopifi.com/md/glossary/deferred-revenue): Northwind owed Pinecrest goods. ([Cash, accrual and cut-off](https://lopifi.com/md/learn/cash-versus-accrual) is the accounting track's version of the same gap.)

*[Journal entries: JE-12]*

The deposit, from the September book.

> “If a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (that is, a receivable), before the entity transfers a good or service to the customer, the entity shall present the contract as a contract liability when the payment is made or the payment is due (whichever is earlier).”

© Financial Accounting Foundation. All rights reserved.

— [ASC 606-10-45-2](https://asc.fasb.org/606/tableOfContent), Cash taken before delivery is a contract liability

## 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.

> **Control, not the invoice.** ASC 606 gives indicators that control has passed: a present right to payment, legal title, physical possession, the risks and rewards of ownership, and the customer's acceptance. Delivery to Pinecrest ticks the ones that matter here. An invoice sent before delivery would not.

> “In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:”

© Financial Accounting Foundation. All rights reserved.

— [ASC 606-10-25-30](https://asc.fasb.org/606/tableOfContent), Indicators that control of a good has passed to the customer

*[Figure: accrual vs cash]*

Ridgeway's INV-1006, $2,000: earned in October, paid in December. Accrual books put it in October; cash-basis books would wait for the money.

## The other three combinations

| What happened first | Balance sheet | Northwind |
| --- | --- | --- |
| Cash, before delivery | [Contract liability](https://lopifi.com/md/glossary/deferred-revenue) (deferred revenue) | JE-12, the deposit |
| Delivery and invoice together | [Accounts receivable](https://lopifi.com/md/glossary/accounts-receivable) | JE-7, INV-1001 |
| Delivery, invoice not yet sent | [Unbilled receivable](https://lopifi.com/md/glossary/unbilled-receivable) | None this year |
| Delivery, payment still conditional on more work | [Contract asset](https://lopifi.com/md/glossary/contract-asset) | None this year |

Billing and recognition are independent. Each combination has its own balance-sheet line.

*[Figure: deferred revenue]*

Illustrative: an annual subscription billed up front, released month by month. The figure's own defaults, not Northwind's.

**Use case — Billed annually, recognized monthly.** A SaaS startup invoices an annual plan on January 1, due in 30 days, for service starting the same day. Once the payment is due, the right to it is unconditional, so the invoice is a receivable against a contract liability. Each month-end, one twelfth moves from deferred revenue to revenue, whether or not the customer has paid yet.

> **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

- [ASC 606-10-05-3, -05-4; 606-10-25-23, -25-30](https://asc.fasb.org/606/tableOfContent) — Revenue from Contracts with Customers — the core principle, and recognition when control transfers (codification)
- [ASC 606-10-45-2](https://asc.fasb.org/606/tableOfContent) — Cash taken before delivery is a contract liability (codification)
- [ASC 606-10-25-30](https://asc.fasb.org/606/tableOfContent) — Indicators that control of a good has passed to the customer (codification)
- [ASC 606-10-45-4](https://asc.fasb.org/606/tableOfContent) — A receivable is an unconditional right to consideration (codification)

## Read further

- https://lopifi.com/md/journal-entries/customer-deposit
- https://lopifi.com/md/journal-entries/deferred-revenue
- https://lopifi.com/md/journal-entries/accrued-revenue
- https://lopifi.com/md/differences/deferred-revenue-vs-accrued-revenue
- https://lopifi.com/md/differences/accrual-vs-deferral
- https://lopifi.com/md/startups/revenue-recognition-for-saas-contracts
- https://lopifi.com/md/startups/deferred-revenue-for-saas
- https://lopifi.com/md/accounting/asc-606
- https://lopifi.com/md/accounting/deferred-revenue
- https://lopifi.com/md/accounting/cutoff
- https://lopifi.com/md/docs/domain/05-order-to-cash
- https://lopifi.com/md/docs/domain/04-schedules-and-accruals

- **Track:** [Accounts receivable](https://lopifi.com/md/learn/ar)
- **Lesson:** Lesson 4 of 9 — 10 min
- **Terms taught:** [Deferred revenue](https://lopifi.com/md/glossary/deferred-revenue), [Revenue recognition](https://lopifi.com/md/glossary/revenue-recognition), [Performance obligation](https://lopifi.com/md/glossary/performance-obligation), [ASC 606](https://lopifi.com/md/glossary/asc-606), [Unbilled receivable](https://lopifi.com/md/glossary/unbilled-receivable), [Contract asset](https://lopifi.com/md/glossary/contract-asset)
- **Previous:** [Payment terms, discounts and late fees, AR · Lesson 3](https://lopifi.com/md/learn/net-30-payment-terms-and-discounts)
- **Next:** [Collections and the dunning cadence, AR · Lesson 5](https://lopifi.com/md/learn/how-to-collect-unpaid-invoices)
- **The course:** https://lopifi.com/md/learn