Revenue Recognition: Why So Many Get It Wrong

8 Dec

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Every week I speak to business owners, bookkeepers and even some finance staff who are confused about one simple question:

“When must I recognise revenue?”

Some think it is when the customer places an order.
Others think it is when they get paid.
Some wait until the customer collects the goods.

The truth is that none of these answers are fully correct. Revenue recognition is not based on orders, invoices, or payments. It is based on something much more important in accounting: performance.

This article explains revenue recognition in simple terms, using the rules from Section 23 of the IFRS for SMEs, without the jargon.

The big idea: Revenue follows performance, not cash

The core rule is this:

You recognise revenue when you have fulfilled your promise to the customer and the customer has obtained control of the goods or services.

This means:

Not when they order
Not when they pay
Not when they like your quote

Revenue belongs to the moment when you have delivered what you promised.

Why orders do not count

Businesses love order books. Orders give hope. They show demand. They help plan stock.

But an order is not revenue.

At order stage:

Nothing has been delivered yet
The customer can still cancel
You have not fulfilled anything

So no revenue is recognised.

This is one of the most common mistakes in small businesses. An order is exciting, but it is not accounting performance.

Why payment does not equal revenue

Many people still use a “cash mindset” and assume revenue happens when money enters the bank. That works for cash sales, but it fails everywhere else.

If a customer pays you before you deliver, you cannot recognise revenue. You owe them goods or services. In accounting this is a contract liability, often shown as:

Customer deposits
Deferred revenue
Advance payments

On the other hand, when a customer pays after you deliver, revenue is recognised when you delivered, not when the cash arrives. That means you record:

Revenue, and
A trade receivable

So the old rule “no money, no revenue” is simply not correct.

Delivery is often the real trigger

In most trading businesses, revenue is recognised when the goods are delivered. Not because “delivery date is the rule”, but because delivery is normally the moment control passes.

Control means the customer can:

Use the item
Benefit from it
Prevent others from using it

Common signs that control has passed include:

Customer has the product in hand
Legal title transferred
You have a right to payment
They carry the risks and rewards
They have accepted the item

When these are in place, revenue is recognised.

Examples that make it clear

Example 1: Customer pays a deposit

A client pays a 50 percent deposit for a customised item.

Do you recognise revenue?
No. You still owe them the item. The deposit is a liability until you deliver.

Example 2: Customer orders on account

Customer orders R80 000 worth of stock. Delivery next week. Payment 30 days after delivery.

When is revenue recognised?
On delivery, when control passes.
Not on order.
Not on payment.

Example 3: A monthly service

You provide monthly cleaning for a fixed fee.

When is revenue recognised?
As you provide the service.
The customer receives the benefit every day.
Revenue is recognised over time, not at month end unless that matches the pattern of service.

Sales over time vs sales at a point in time

Section 23 allows two patterns:

1. Revenue at a point in time

Typical for:

Retail sales
Deliveries of stock
Single item purchases

This happens when control transfers in one moment.

2. Revenue over time

Typical for:

Long projects
Consulting
Construction on the customer’s property
Customised goods that cannot be sold to anyone else

Here you recognise revenue gradually as you work, because the customer benefits as you perform.

A simple checklist for recognising revenue correctly

Before you recognise revenue, ask:

Have we delivered what we promised?
Does the customer now control the product or service?
Is this a once off delivery or a service over time?
Are we sure the customer will pay? (There must be a valid contract)
If we received cash early, do we still owe something? (If yes, it is a liability)

If you cannot answer yes to the first two questions, it is not revenue yet.

Why getting this right matters

Revenue is the largest number in most financial statements. Getting it wrong can cause:

Incorrect profit
Wrong tax estimates
Broken ratios
Overstated assets or understated liabilities
Audit and review findings
Loss of business credibility

Revenue recognition is not just an accounting exercise. It affects the entire business.

The bottom line

Here is the simplest way to remember it:

Revenue is recognised when you have done your part, and the customer now has the benefit.

Orders do not count.
Payments do not count on their own.
Delivery, completion and control do.

If your team or clients still use old habits such as “recognise revenue when invoiced” or “recognise when paid”, this is the perfect time to update your accounting policy and align with Section 23.

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