Revenue Recognition: Why So Many Get It Wrong

Every week I speak to business owners, bookkeepers, and even some finance staff who are confused about one simple question: “When must I recognise revenue?” Some think it is when the customer places an order. Others think it is when they get paid. Some wait until the customer collects the goods.

The truth is that none of these answers are fully correct. Revenue recognition is not based on orders, invoices, or payments. It is based on something much more important in accounting: performance.

The Big Idea: Revenue Follows Performance, Not Cash

This means revenue is recognised:

• Not when they place an order
• Not when they pay
• Not when they accept your quote

Revenue belongs to the exact moment when you have delivered what you promised, as set out in Section 23 of the IFRS for SMEs.

Why Orders and Payments Are Not Triggers

1. Why Orders Do Not Count

Businesses love order books because they show demand and help plan stock. However, at the order stage, nothing has been delivered, the customer can still cancel, and no performance has taken place. An order is exciting, but it is not accounting performance.

2. Why Payment Does Not Equal Revenue

A “cash mindset” assumes revenue occurs when money enters the bank. That works for cash sales, but fails everywhere else:

• Payment Before Delivery: If a customer pays early, you cannot recognise revenue because you still owe them goods or services. In accounting, this is recorded as a contract liability (e.g., customer deposit or deferred revenue).
• Payment After Delivery: When you deliver before receiving cash, revenue is recognised immediately at delivery alongside a trade receivable.

Delivery and Control

In trading businesses, revenue is recognised on delivery because delivery is normally when control passes. Control means the customer can use the item, benefit from it, and prevent others from using it.

Common signs that control has transferred include:

• Customer has physical possession of the product
• Legal title has transferred
• You have an enforceable right to payment
• The customer carries the risks and rewards of ownership
• The customer has formally accepted the item

Practical Examples

Point in Time vs. Over Time

Section 23 outlines two main patterns for recognising revenue:

1. Point in Time: Typical for retail sales and single stock deliveries where control transfers in one specific moment.
2. Over Time: Typical for long-term projects, consulting, construction, or custom goods that cannot be repurposed. Revenue is recognised gradually as work progresses.

Why Getting This Right Matters

Revenue is the largest number on most financial statements. Incorrect recognition leads to distorted profit figures, inaccurate tax calculations, broken financial ratios, overstated assets, and audit findings.