Revenue Recognition Made Simple: Deferred vs. Unbilled Revenue

Revenue numbers don’t always tell the full story of your company’s financial health.

Companies may misrepresent their financials by recording revenue at the wrong time. If your company recognises revenue too early, it inflates the performance, while recording revenue late hides the real growth.

That’s where revenue recognition plays an important role.

Revenue recognition makes sure revenue is recorded in the right period by matching the revenue with the period in which it’s generated.

Let’s understand with an example. 

Let’s say you buy a phone, the store recognizes the revenue immediately upon the sale. 

On the other hand, if you sign up for an annual software subscription, the company spreads the revenue recognition over the 12 months as it provides the service.

Let’s start with the basics of revenue recognition.

Under accrual accounting, revenue recognition splits into two key types:

1. Deferred revenue:  Money received upfront for services or products not yet provided, counted as revenue later over the delivery period.
2. Unbilled revenue: Money earned for services or products already delivered but not yet billed, counted as revenue when the invoice is sent.

In this article, we’ll cover how revenue recognition can make or break your SaaS growth. We’ll break it down by answering these questions.

• Why revenue recognition matters in financial reporting
• What is the difference between deferred revenue and unbilled revenue
• What is the process for revenue recognition with compliance standards
• How to manage deferred and unbilled revenue
• How to adopt best practices to stay compliant while getting revenue recognition right

Let’s first discuss the purpose of revenue recognition.

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What is Revenue Recognition?

Recognising Revenue is an accrual accounting principle that helps you record the revenue when it’s earned, not when the payment is received.

When a business delivers a project but hasn’t sent the invoice yet, it may still recognise that revenue because the project is already completed.

This method of recognizing revenue as work is completed gives a true picture of financial performance while serving the purpose of accountability and compliance.

Revenue recognition will help you in:

• Ensuring Financial Accuracy by making sure you record the right amount of revenue at the right time, avoiding mistakes like reporting too much or too little income.
• Staying Compliant with accounting standards like ASC 606 and IFRS 15, avoiding legal and regulatory issues.
• Building Trust & Transparency by providing clear financial data for investors, auditors, and stakeholders.
• Preventing Fraud & Misstatements by reducing the risk of financial manipulation, errors, and legal penalties.

The timing of revenue can often get complex. You may have already received payment for a service you’ll deliver in the future. Or, you might have completed the work but haven’t yet sent the invoice. These situations don’t just affect how you report revenue — they impact your balance sheet too.

To manage this well, you need to distinguish between Deferred Revenue and Unbilled Revenue.

Deferred Revenue vs Unbilled Revenue

Some payments act as liabilities, while some remain unbilled. This could create confusion, right? 

Let’s clear up the confusion by addressing the difference between two:

 1. Deferred Revenue

• You receive an upfront payment before delivering the service.
• This revenue is recorded as a liability since you still need to provide the service.
• Revenue is recognized gradually over time as you fulfill the service.

For example, A customer pays you $1200 in advance for an annual subscription, but you recognize $100 revenue monthly.

2. Unbilled Revenue

• You provide the service but haven’t sent the invoice yet, as you bill quarterly.
• This revenue is recorded as an asset because revenue is expected every quarter
• Revenue is recognized once invoiced to the customer.

Imagine you delivered a $5,000 custom software solution on April 10, but since you bill monthly, the invoice won’t be sent until April 30.

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What are the common misconceptions about revenue recognition?

Getting revenue recognition wrong can disrupt your finances, cause compliance issues, and hurt investor confidence..

It’s not just about recording revenue numbers; it’s about staying accurate, avoiding penalties, and making smart business decisions.

Here are some misconceptions every founder should know about:

1. Cash vs. Revenue

Getting paid does not always mean you’ve earned the revenue. 

• You might think revenue counts as soon as you get paid.
• You should only recognize revenue after delivering the service or product, even if the payment is already in your account
  
  

2. Deferred Revenue = Immediate Income

You got advance payments. Wait, don’t celebrate; you still need to provide the service before it counts as revenue.

• Thinking of deferred revenue as actual income.
• It acts as a liability until the service is delivered.

3. Unbilled Revenue = Unrecognized Revenue

If you have not sent an invoice, wait for the billing period. This doesn’t mean you have not earned the revenue.

• You thought that revenue only exists after invoicing.
• Revenue is earned when the service is provided, even before billing.

4. ASC 606 Applies Only to Large Companies

You might think revenue recognition rules don’t apply to your business. If you’re earning revenue, ASC 606 matters for your business, too!

• Believing in the myth that only larger companies need to follow revenue recognition rules.
• ASC 606 compliance standards apply to all businesses that generate revenue, including SaaS startups and service providers.

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What is the ASC 606 Framework & Revenue Recognition Standards

ASC 606 (Accounting Standards Codification 606) is the revenue recognition standard under US GAAP (Generally Accepted Accounting Principles). It provides a unified framework for recognizing revenue across all industries in the United States.

On the other hand, IFRS 15 (International Financial Reporting Standard 15) is the global standard issued by the International Accounting Standards Board (IASB). It ensures consistency in revenue recognition across different countries.

These standards are followed in the five-step model for revenue recognition and aim to improve transparency, comparability, and consistency in financial reporting.

Overview of ASC 606 & IFRS 15

Moving forward. Do you remember what revenue recognition is? It isn’t just about when you get paid; it’s about when you earn it.

Before the introduction of the ASC 606 framework, different industries had inconsistent revenue recognition rules. Leading to adverse impacts :

• Inconsistent revenue recognition made financial statements hard to compare.
• Lack of transparency left investors unsure about a company’s true financial health.
• Compliance challenges made it difficult for businesses to meet accounting standards.

That’s the reason why ASC 606 (US GAAP) and IFRS 15 (International Standard) were introduced to provide a structured, standardized framework for businesses worldwide to recognize revenue consistently and accurately.

Here, we have listed the impacts of ASC 606 and IFRS 15 standards:

• Standardize revenue recognition across industries,
• Transparency in financial reporting.
• Comparability makes it easier to assess companies' financial performance
• Compliance helps you reduce errors and regulatory risks.

What are the steps in the process of revenue recognition 

The joint standards outlined in ASC 606 and IFRS 15 require companies to follow a five-step revenue recognition model to help in recognising revenue accurately and consistently.

Here’s your step-by-step process to recognize the revenue accurately:

Step 1: Identify the Contract with the Customer

You have to make sure every agreement, either big or small, has clear terms and rights. This contract is often a formal written agreement.  

Step 2: Identify the Performance Obligations

Break down the contract into each deliverable (like software access, support, or setup services) with agreed performance and deadline. Each one counts as a promise to your customer.

Step 3: Determine the Transaction Price

Define a transparent pricing and refund policy. Clarity on discounts, rights to return, and variable fees. On what terms the transaction is exchanged with the customer and you’ll be paid.

Step 4: Allocate the Transaction Price to Performance Obligations

Divide the total payment across the different deliverables based on their performance requirements and value while also considering variable considerations. This helps track revenue from each deliverable.

Step 5: Recognize Revenue When Performance Obligations Are Met

Only record revenue when you’ve delivered what you promised—whether that’s instantly or over time.

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Summing Up: Benefits of the Right Revenue Recognition

Whether revenue insights collected from accurately recognizing the revenue are important. Do you doubt that? Insights like knowing that 20% of monthly sales were from preorders.

Now, you can also focus on targeting those customers to generate recurring revenue.

Here is how you will benefit from the right revenue recognition.

1. Financial Transparency: Track your actual earnings by only counting sales for products or services you’ve already delivered last month.
2. Maintain Investor Trust:  Build trust with investors by showing them your real revenue, not just the cash you’ve collected.
3. Stay Compliant:  Protect your business from legal issues by checking with your accountant to ensure you’re following revenue reporting rules.
4. Predict Cash Flow: Improve your budgeting by basing it on confirmed revenue, not on unfulfilled promises or future payments.

Revenue recognition doesn’t have to be a headache.  You can transform revenue recognition complexity and turn it into a strategic advantage over competitors by understanding 

• The difference between deferred vs. unbilled revenue.
• What is the ASC 606 framework 
• Working of the five-step revenue recognition process.
• adopting benefits and considering challenges.

Are you ready to simplify the process of revenue recognition? Start by reviewing your approach, standardizing your policies, and exploring automation tools like Inkle to cut down on errors and save time. 

Book a demo with Inkle today and take control of your revenue recognition with confidence.

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Frequently Asked Questions

1. What is the difference between deferred revenue and unbilled revenue?

Deferred revenue is cash collected upfront for services or goods yet to be delivered is like a gym membership paid annually in advance, recorded as a liability until earned. 

Unbilled revenue, however, is revenue earned but not yet invoiced, such as a consulting project completed mid-month but billed quarterly, treated as an asset until invoiced. 

2. Why is ASC 606 important for businesses, and how does it impact financial reporting?

ASC 606 standardizes revenue recognition across industries, replacing inconsistent rules with a clear framework. For example, a software company now recognizes subscription revenue over time, not just at payment, improving comparability and transparency. This boosts stakeholder trust and ensures compliance with global standards like IFRS 15, reshaping how financial performance is reported.

3. What are the biggest challenges businesses face with revenue recognition compliance?

Companies find it hard to split setup fees from ongoing services in SaaS deals, set prices with changing discounts, and track deferred revenue in long projects.

4. How can technology, like ERP systems or AI, simplify revenue recognition compliance?

ERP systems like NetSuite update revenue schedules automatically for complex contracts, and AI predicts pricing trends to cut down on manual work. For example, a retailer using AI-driven tools can instantly adjust revenue for returns across online and in-store sales, cutting errors and ensuring ASC 606 adherence with less effort.

5. What are the benefits of getting revenue recognition right for my business?

Proper revenue recognition clarifies true earnings like showing steady income from a SaaS subscription rather than significant cash spikes , winning investor confidence. It also sharpens forecasting.