Revenue Recognition

Revenue recognition is the accounting principle that governs when a business records income in its financial accounts. The key distinction is between when cash is received and when revenue is earned. A deposit collected before a project starts is not yet revenue - it is a liability until the corresponding work is delivered. Equally, work completed but not yet invoiced represents earned revenue, even before the invoice goes out. For project-based businesses billing in stages, misaligning these two produces accounts that do not reflect actual trading performance.

Revenue Recognition Methods for Project Businesses

For businesses that trade in single transactions - selling a product and delivering it the same day - revenue recognition is straightforward. Project businesses face more complexity. Construction contractors, AV integrators, and furniture dealers commonly apply one of three approaches:

Percentage of completion: Revenue is recognized progressively as the project advances, typically based on costs incurred relative to total estimated costs. This matches income to the actual progress of the work and gives a continuous view of trading performance throughout a long contract.

Milestone method: Revenue is recognized when specific, predefined deliverables are completed and accepted by the customer. This works well for projects with clearly defined phases - a completed survey, a commissioned system, a signed-off installation. Each phase, when accepted, triggers recognition for that portion of the contract value.

Completed contract: Revenue is recognized only when the full project is finished. Simpler to apply, but can distort the accounts for anything other than short projects, since costs accumulate without matching income until the final invoice.

Under UK accounting standard FRS 102 (Section 23, updated from 1 January 2026 to align with the IFRS 15 five-step framework), milestone payments must correspond to distinct, separately identifiable deliverables to qualify for point-in-time recognition. A milestone that functions purely as a billing trigger - timed to a date rather than tied to a deliverable - must instead be deferred and released as the underlying work progresses.

Billing Timing and Recognition Timing

Billing timing and revenue recognition timing do not have to match - and in project businesses, they frequently do not. A stage payment collected in advance creates deferred revenue: cash has arrived but income is not yet earned. Work delivered ahead of invoicing creates accrued income: revenue is earned but not yet collected. Both positions are normal. The issue arises when the accounts simply treat invoice date as revenue date without review.

The practical discipline is a month-end job review: for each open contract, assess how much of the contracted value has genuinely been delivered and compare that to what has been billed. Where invoicing runs ahead of delivery, the difference is deferred. Where delivery runs ahead of invoicing, it accrues. This review underpins accurate management accounts and is what makes progress billing conversations meaningful - grounding them in actual performance rather than cash position.

Zigaflow's invoicing feature allows invoices to be linked to specific project milestones, making it straightforward to cross-reference what has been billed at each stage against what has actually been delivered.