Based on the original article by Leana van der Merwe, Accounting Weekly
Every week, business owners, finance staff, and bookkeepers ask the same question:
“When should revenue actually be recognised?”
Some believe it’s when an order is placed. Others assume it’s when payment is received. Some wait until the customer physically collects the goods.
The truth? None of these approaches fully comply with accounting standards. Revenue recognition is not about orders, invoices, or payments—it’s about performance.
The Core Principle: Revenue Follows Performance, Not Cash
Revenue should be recognised when you’ve delivered on your promise and the customer has control of the goods or services.
This means revenue is not recognised:
- When the customer orders
- When payment is received
- When a quote is approved
Revenue is tied to the moment you’ve fulfilled your obligations.
Why Orders Don’t Count
Orders may indicate demand or help plan stock, but they don’t represent completed performance. At the order stage:
- Nothing has been delivered
- The customer can still cancel
- No obligation has been satisfied
Thus, no revenue is recorded.
Why Payment Alone Isn’t Enough
A cash-first mindset can mislead businesses. Revenue isn’t automatically recognised when money changes hands:
- Advance payments or deposits represent a liability (e.g., deferred revenue or customer deposits) until the product or service is delivered.
- Post-delivery payments are recorded as revenue at delivery, with a trade receivable, not when cash arrives.
Delivery and Control
In most trading scenarios, revenue is recognised when the goods or services are delivered, as this is usually when control passes to the customer. Control implies the customer can:
- Use and benefit from the item
- Restrict others from using it
- Accept legal and economic risks and rewards
Signs that control has transferred include possession, legal title, right to payment, and acceptance of the goods or services.
Practical Examples
- Deposit for a customised item: Revenue is not recognised until the item is delivered; the deposit remains a liability.
- Order on account: Revenue is recorded when goods are delivered, not when the order is placed or payment made.
- Monthly services: Revenue is recognised progressively as the service is rendered, reflecting the customer’s ongoing benefit.
Revenue Patterns: Point in Time vs Over Time
Point in Time – Suitable for retail, stock deliveries, or one-off purchases; recognised when control passes.
Over Time – For long-term projects, consulting, construction, or customised goods; recognised progressively as the customer benefits.
Revenue Recognition Checklist
Before recognising revenue, confirm:
- Have you delivered what was promised?
- Does the customer control the product or service?
- Is it a one-off or continuous service?
- Is payment assured under a valid contract?
- If cash was received early, is there still a liability?
Revenue should only be recorded if the first two conditions are met.
Why Accuracy Matters
Revenue affects the largest figures in financial statements. Misstating it can lead to:
- Incorrect profits
- Wrong tax calculations
- Misstated ratios, assets, or liabilities
- Audit findings
- Damage to credibility
The Bottom Line
Revenue is recognised when you’ve fulfilled your promise and the customer has control.
- Orders alone don’t count
- Payments alone don’t count
- Delivery, performance, and control are key
Aligning your policies with Section 23 of IFRS for SMEs ensures correct reporting and avoids common pitfalls.