Let’s say you run a lemonade stand. Every cup of lemonade is delivered at the time of purchase, so your lemonade stand’s revenue recognition is immediate. You sell it, you earned it—plain and simple.
But not every business runs on instant gratification. Maybe you’re a personal trainer who sells blocks of training hours, or a house-cleaning service that runs on a subscription basis. Customers pay upfront while their usage of your products and services are staggered, which means your business hasn’t technically “earned” that lump-sum revenue.
Revenue recognition is the exercise accountants and business owners go through to match delivered goods and services to earned revenue. A personal trainer may sell packages of 20 hours of training for $2,000 and then agree to 4 hours per month with each client. As each month goes by and 4 hours of training are completed, $400 in revenue is recognized.