Quick answer
Revenue is income arising from a business’s ordinary activities. For customer contracts, it is recognized as the business fulfils its customer promise to the extent supported by the applicable framework—not simply when cash is collected or an invoice is sent.
A business can provide goods or services before or after receiving cash. A credit sale creates revenue before collection; a customer advance creates a liability before the related revenue is recognized. Keeping performance, billing, and collection separate is essential to recording each event in the correct period.
This article focuses on revenue from customer contracts. Revenue can also include interest, dividends, or rent earned in ordinary activities, with recognition governed by their applicable requirements. An owner contribution or loan is different: either receipt can increase Cash, but neither is revenue.
IFRS and ASPE revenue models
Under IFRS 15, revenue follows the transfer of control over promised goods or services to the customer. The analysis has five steps:
- Identify the contract with the customer.
- Identify the performance obligations—the distinct goods or services promised.
- Determine the transaction price, including estimated discounts, rebates, and returns.
- Allocate the price to the performance obligations.
- Recognize revenue when, or as, each obligation is satisfied—at a point in time or over time.
Under ASPE Section 3400, sales and service revenue is recognized when performance is achieved and ultimate collection is reasonably assured. Goods are assessed using arrangement evidence, delivery or performance, price measurability, collection, and transfer of significant risks and rewards. Services and long-term contracts use the method that relates revenue to work accomplished; billings alone do not measure progress. ASPE also analyzes identifiable components and linked transactions at the appropriate unit of account and uses principal-versus-agent indicators for gross or net presentation.
The two models usually reach the same answer for a straightforward sale, but their tests are not interchangeable.
Point-in-time and over-time revenue
A delivered product is commonly a point-in-time sale. Consulting, cleaning, or a subscription may be performed over time, so revenue accumulates as the service is provided. Receiving cash does not by itself show that performance occurred, and an invoice does not by itself settle the recognition question.
Customer balances
Consideration is the cash or other value the customer promises in exchange for goods or services. Because performance, billing, and payment can fall on different dates, the balance between them is tracked separately. Under IFRS, a contract asset is a right to consideration that still depends on further performance; a receivable is unconditional except for the passage of time; a contract liability is consideration received or due before performance. ASPE practice usually calls that liability unearned revenue or customer deposits.
Customer Sales and Sales Adjustments shows the entries for advances, completed sales, collections, returns, discounts, and sales tax.
IFRS 15 contract analysis
Under IFRS 15, revenue analysis begins only when an arrangement meets the contract criteria, including approved enforceable rights (each party can be required to fulfil its promises), identifiable payment terms, commercial substance (a change in the risk, timing, or amount of future cash flows), and probable collection (the entity expects to collect the consideration to which it will be entitled).
- Performance obligation
- A distinct promised good or service, or a series of distinct goods or services transferred in the same pattern, that the business must provide to the customer.
- Distinct promised item
- An item the customer can benefit from on its own or with available resources and that is separately identifiable from the other promises in the arrangement.
- Stand-alone selling price
- The price the business would charge for a promised good or service if it sold that item separately to a customer.
A highly integrated input may not be a separate performance obligation merely because it appears as a separate line in a quote.
Once the distinct promises are identified, the entity determines the transaction price and allocates it using relative stand-alone selling prices. For each promise, the allocation is transaction price × that promise’s stand-alone selling price ÷ total stand-alone selling prices. Each allocated amount is recognized as control transfers.
Allocate a bundle and follow the contract liability
Pacific Office Systems applies IFRS and signs a contract on November 1 to provide a printer and six months of maintenance for $6,600. The printer sells separately for $6,000 and maintenance for $1,200. The customer pays $3,600 in advance, receives the printer on November 1, and is invoiced for the remaining $3,000 on delivery. Maintenance is a distinct stand-ready service provided evenly from November through April. Ignore tax, financing, returns, and credit losses.
Identify promises and allocate consideration
The printer and maintenance can each benefit the customer and are separately identifiable, so they are two performance obligations. Relative stand-alone selling prices total $7,200.
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| Promise | Relative share | Allocated revenue |
|---|---|---|
| Printer | $6,000 ÷ $7,200 | $5,500 |
| Maintenance | $1,200 ÷ $7,200 | $1,100 |
| Total | 100% | $6,600 |
Before delivery, the $3,600 cash receipt is not earned revenue because neither the printer nor the maintenance has been provided. Cash increases, and a Contract Liability records the obligation to deliver goods and services for the advance already received.
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| Account | Debit | Credit |
|---|---|---|
| Cash | 3,600 | |
| Contract Liability | 3,600 |
On delivery, $5,500 of printer revenue is recognized. Because only $3,600 was received in advance and the remaining $3,000 is now an unconditional billed right, the entry records a receivable while leaving $1,100 for future maintenance.
Debit Contract Liability $2,500 to reduce the existing $3,600 advance and Accounts Receivable $3,000 for the unpaid consideration. Credit Product Revenue $5,500 for the delivered printer, leaving $1,100 in a Contract Liability for maintenance not yet provided. The invoice is not additional revenue beyond the $5,500 allocated to the printer.
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| Account | Debit | Credit |
|---|---|---|
| Contract Liability | 2,500 | |
| Accounts Receivable | 3,000 | |
| Product Revenue | 5,500 |
Two months of the six-month service are provided by December 31: $1,100 × 2/6 = $366.67.
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| Account | Debit | Credit |
|---|---|---|
| Contract Liability | 366.67 | |
| Maintenance Revenue | 366.67 |
Bundle through December 31
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| Statement | Account | Effect | Timing |
|---|---|---|---|
| Income statement | Revenue | $5,500 product revenue plus $366.67 maintenance revenue | November–December |
| Balance sheet | Contract liability | $733.33 remains for January–April service | December 31 |
| Balance sheet | Receivable | $3,000 remains until collected | After invoicing |
| Cash flow statement | Cash | Only the $3,600 advance affects cash so far | To December 31 |
- Income statement
- AccountRevenue
- Effect$5,500 product revenue plus $366.67 maintenance revenue
- TimingNovember–December
- Balance sheet
- AccountContract liability
- Effect$733.33 remains for January–April service
- TimingDecember 31
- Balance sheet
- AccountReceivable
- Effect$3,000 remains until collected
- TimingAfter invoicing
- Cash flow statement
- AccountCash
- EffectOnly the $3,600 advance affects cash so far
- TimingTo December 31
Advanced IFRS revenue considerations
Bonuses, rebates, penalties, price concessions, returns, and refunds can make consideration variable. Under IFRS, the estimate includes only the amount for which it is highly probable that resolving the uncertainty later will not require a significant reversal of the revenue recognized to date. The estimate is updated as facts change. Expected returns can require both a refund liability and an asset for the right to recover products, rather than recording gross revenue and waiting for actual returns.
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| Fact pattern | Accounting question |
|---|---|
| Warranty | Is it only assurance that the product complies, or a distinct service the customer can purchase? |
| Intermediary sale | Does the entity control the promised good or service before transfer, or arrange for another party as agent? |
| Consignment | Has control transferred to the intermediary, or can the supplier require return or direct the product elsewhere? |
| Modified contract | Are added goods or services distinct and priced at stand-alone amounts, or must the existing contract accounting be updated? |
| Long payment delay | Does financing materially affect the promised consideration? |
Common errors
- Calling every cash receipt revenue, including loans, owner contributions, and customer deposits.
- Waiting for collection before recognizing a completed credit sale.
- Recognizing the whole deposit when only part of a service has been delivered.
- Ignoring expected returns, refunds, or discounts when measuring the amount retained.
- Recording revenue twice—once at the credit sale and again when the receivable is collected.
After revenue is recognized, an unpaid customer balance raises a separate question: how much will be collected? Accounts Receivable explains collection, allowances, and write-offs.