Accounting
ASC 606 (Revenue from Contracts with Customers)
The U.S. accounting standard for recognizing revenue — when, how much, and from which performance obligation.
ASC 606 replaced industry-specific revenue rules with a single five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price across obligations, and recognize revenue as each obligation is satisfied.
It matters most to subscription, retainer, and milestone-billed businesses — agencies, SaaS, professional services, and any business that collects cash before delivering. Setup fees, annual prepayments, and bundled service packages all require ratable recognition.
Under ASC 606, cash collected ahead of delivery sits on the balance sheet as deferred revenue and amortizes into revenue as the service is performed.
Common pitfalls
- Recognizing setup or onboarding fees upfront instead of over the customer's expected life
- Treating multi-year prepayments as year-one revenue — distorts margins and breaks investor/lender reporting
- Skipping the deferred revenue ledger and recognizing on a cash basis — works until you face diligence or an audit
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