What is recognized revenue?
Recognized revenue is when a booking becomes actual revenue by you delivering the product promised to your customer and goes into your accounts receivables.
What about the rest of the booking while you’re waiting for their subscription to progress over time? How do we track that properly? That’s called deferred revenue: essentially the revenue you’re expecting from your booking, but you haven’t delivered on the agreement to the customer quite yet, so you still can’t quite count this as revenue.
Recognized and deferred revenue example: You received the $24,000 contract that you booked (the booking) in January. You accrue revenue for each day you fulfill the contract with your customer, recognizing that revenue in your receivables. The rest of the revenue on the contract is deferred revenue until you deliver.
What is recognized and deferred used for? Why do you need to track it?
Accrual accounting seems overly complicated, right? Why are accountants trying to make our lives hard here? Turns out they’re actually trying to make your life much easier by allowing you to make accurate predictions concerning your cash flow and clearing up the financial health of your business.
Accountants are able to do this because they’re matching your revenues/expenses when a transaction actually occurs, rather when you receive the actual cash from your customer. Why is that good? Well, in my pedantic example of one $24,000 contract it’s actually more complicated than needed because you can easily track $24,000. In a large business (even $1M or more) transactions, sales, and the timeline of a subscription contract make things super complicated and potentially muddled.
Imagine thousands of subscriptions and millions of dollars in revenue. Managing your recognized and deferred revenue will actually help you predict where you’re going and how quickly you can grow your expenses. In this manner, your accountant is more of a master strategist, rather than “some guy/gal who makes sure our taxes get done."