When is revenue considered earned?

Learn when revenue is considered earned under cash and accrual accounting methods, and review examples of revenue models.

For most businesses, you can decide if you use cash or accrual accounting methods:

• Cash basis method: Revenue is considered earned when the cash is received regardless of whether goods or services are provided or not. Smaller businesses generally prefer this method because it simplifies some accounting.
• Accrual basis method: Revenue is considered earned when the goods or services are provided regardless of whether cash is received or not (FASB, ASC 606-10-25). You must record unearned revenue as deferred revenue (a liability) until the goods or services have been provided.

Revenue recognition example

The following example illustrates the difference between methods.

Scenario: On January 1st 2026, Company A enters into a contract to sell raw materials for $300 to a customer.

• Payment received: January 1st 2026
• Materials delivered: January 12th 2026

Recording under cash basis

Company A recognizes the revenue of $300 immediately on January 1st 2026 when it receives the payment from its customer.

Journal entry on January 1st 2026 (Payment received):

• Debit: Cash $300
• Credit: Revenue $300

Recording under accrual basis

Company A won’t recognize its revenue until the raw materials are delivered to its customer.

Journal entry on January 1st 2026 (Payment received):

• Debit: Cash $300
• Credit: Deferred revenue $300

Journal entry on January 12th 2026 (Materials delivered):

• Debit: Deferred revenue $300
• Credit: Revenue $300

Revenue recognition for different revenue models

Here’s how to recognize revenue for different revenue models:

• Subscription based revenue: Revenue is recognized over the period of the contract evenly.
• Project-based or milestones revenue: Revenue is recognized at a point in time when each performance obligation is met (upon completing each milestone).
• Percentage of completion revenue: Revenue is recognized as work progresses according to the percentage of the project completed.
• Completed Contract: All revenue is recorded at the completion of the contract.

Advanced considerations for larger entities

Larger businesses that need to closely follow GAAP must be precise in determining revenue recognition.

• Five steps to recognize revenue: See ASC 606 for more information on recognizing revenue under the accrual basis method of accounting.
• Principal revenue versus agent revenue: Larger entities may need to determine if they are acting as a principal or an agent in a transaction based on control. See ASC 606-10-55-36 to 606-10-55-40 for more information.

Related links

• Choose between cash and accrual accounting methods in QuickBooks Online

Disclaimer: This article is provided for general informational and educational purposes only and is not intended to provide accounting, tax, legal, or financial advice.