Revenue Recognition for Marketing Agencies (ASC 606)

A marketing agency recognizes revenue when it does the work, not when the client pays. Under ASC 606, the US revenue standard, a retainer paid in advance goes to deferred revenue, a liability, and moves to revenue month by month as you deliver. A fixed-fee project is recognized as the work progresses or on delivery, depending on the contract. A performance bonus is counted only once it is unlikely to be reversed. What you agreed with each client decides all three, so the contract terms come before any journal entry.

This guide covers retainers, projects, bonuses and the tax question founders usually ask next. It is general information. Have your CPA confirm the treatment of your own contracts.

Why cash in the bank is not revenue

Most small agencies start by counting revenue when the money arrives. That works until a client prepays.

An example, for illustration only: a client pays a $45,000 quarterly retainer upfront in January for $15,000 a month of work, and delivery costs you $7,000 a month. Counted as cash, January shows $45,000 of revenue and a big profit, then February and March show $7,000 losses each. Nothing changed in the business. Only the timing of the payment did.

On accrual books, each month shows $15,000 of revenue against $7,000 of cost. That is the margin you can compare month to month, use to plan hiring, and show to a bigger client, an investor or a buyer.

What went wrong at a German agency

A German e-commerce agency of five to seven people tracked only revenue, in spreadsheets, as money came in. It had no expense attribution to clients and no reporting.

Its contracts were a mix. Some clients paid a fixed all-in fee and the agency ran the ads, SEO and the rest at its own judgment. Others were on traditional ad agreements where the client's media money passed through the agency. Terms changed over time for the same client, and nothing recorded which terms applied when. So the revenue line mixed real fees with client media money, and the media money showed up as a hit or a miss against revenue.

The founder wanted the agency to look professional to bigger clients and potential investors. That was not possible while the revenue figure could not say what had been earned. The fix started with the contracts, not the reports: what each client had agreed, from what date, and what that made revenue.

The five steps, applied to an agency

ASC 606 recognizes revenue in five steps. For an agency they come down to these questions:

1. Identify the contract. The signed proposal, statement of work or master services agreement with each client.
2. Identify what you promised. Ongoing management, a website, a campaign, media buying. Each distinct promise is a performance obligation.
3. Determine the price. The fixed fee, plus any variable part such as a performance bonus.
4. Allocate the price across the promises if there is more than one, for example a setup project plus a monthly retainer.
5. Recognize revenue as each promise is satisfied, either over time or at a point in time.

Step 5 is where retainers, projects and bonuses differ.

Retainers: deferred revenue, released monthly

A retainer for ongoing services, such as campaign management or monthly content, is usually satisfied over time. The client receives and uses the benefit as you work (ASC 606-10-25-27(a)). If the client benefits evenly across the period, recognizing the fee in equal monthly amounts fits. The FASB and IASB Transition Resource Group reached that view for obligations to stand ready to provide a service, and also warned against defaulting to straight-line when the work is uneven. See the TRG staff paper on stand-ready obligations.

The entries for the $45,000 quarterly retainer above:

1. Client pays in January. Debit cash $45,000. Credit deferred revenue $45,000.
2. End of each month. Debit deferred revenue $15,000. Credit retainer revenue $15,000.

After three months, deferred revenue is back to zero and the full $45,000 has been recognized in the months it was earned. At any month-end, the deferred revenue balance should equal the work you still owe on prepaid contracts. If your bookkeeper cannot tie that balance to a list of clients and months, it is wrong.

If the retainer is really a fee for a specific deliverable, such as a site rebuild paid over three months, treat it as a project instead.

Fixed-fee projects: progress or delivery

A billing schedule (50% upfront, 25% at wireframes, 25% at launch) tells you when to invoice. It does not tell you when you have earned the money.

A project is recognized over time only if it meets one of the criteria in ASC 606-10-25-27. For most agency projects the relevant one is (c): the work has no alternative use to you, and the contract gives you an enforceable right to payment for work done to date if the client walks away. Read the termination clause. If the client can cancel and owes you nothing for work in progress, you may have to recognize the revenue when you deliver.

When a project does qualify, measure progress with a method that reflects the work (ASC 606-10-55-16 to 55-21). Agencies often use hours spent against total estimated hours, which is an input method. Two cases need care:

• Work done, milestone not yet billed. Revenue earned ahead of the invoice is recorded as a contract asset or unbilled receivable, not left off the books.
• Scope grows without a change order. Extra hours raise your cost estimate but not the price. Update the estimate, and the margin on the project falls. Hours-based progress shows the overrun as it happens rather than at the end.

Performance bonuses: count them late

A bonus tied to results, such as a payment if return on ad spend beats a target for the quarter, is variable consideration. You include it only to the extent it is probable that a significant reversal will not occur once the result is known (ASC 606-10-32-11). In practice, a bonus that depends on the last weeks of a quarter is usually left out until the result is in. Booking it early, then reversing it, makes the earlier months look better than they were.

Client media money is not revenue either

If a client funds a media budget that you spend for them, that money is usually a pass-through. It is a liability, and only your fee is revenue. If you sell a fixed all-in fee and choose the media spend yourself, the media is a cost of delivering your service. This principal-versus-agent judgment is what the German agency's books could not show. The accounting is covered in Agency Ad Spend Pass-Through: Accounting and Liability.

Does accrual accounting change your tax bill?

Not by itself. Your bookkeeping method and your tax method are separate choices.

• If you file taxes on the cash method, which many small businesses can under the gross receipts test in Internal Revenue Code section 448(c), a prepayment is taxable when you receive it. A December prepayment is taxed that year however your books record it.
• If you file on the accrual method, you can elect to defer an advance payment for services to the next tax year, but not beyond it. If you have an applicable financial statement, such as audited accounts, the deferral can go no later than the year the statement includes the income.
• Changing your tax method generally needs the IRS's consent, requested on Form 3115.

The rules are in IRS Publication 538, Accounting Periods and Methods. Plan large year-end prepayments with your CPA before the invoice goes out, not after.

A month-end checklist

1. Keep a register of client contracts: model (retainer, project, pass-through), price, start date, and the date of any change in terms.
2. Release each prepaid retainer from deferred revenue for the month.
3. Update progress on fixed-fee projects that qualify for over-time recognition, and record unbilled work.
4. Leave out bonuses that are not yet earned.
5. Keep client media money out of revenue.
6. Tie the deferred revenue balance to the contract register.

SlickBooks runs this as part of a 5-day close on Xero or QuickBooks Online: upfront retainers spread across the months you deliver, and client media money kept off your revenue line. The marketing agencies service page explains who it is for and what it costs.

Explore Related Agency Financial Guides

• Bookkeeping for Marketing Agencies: A Founder's Guide: the full agency finance picture, including client-level costing and the 5-day close.
• Agency Ad Spend Pass-Through: Accounting and Liability: pass-through or absorbed media, and who is liable to the platform.
• Agency Chart of Accounts: How Founders Structure Books for Real Profit Visibility: where deferred revenue and cost-of-delivery accounts sit.
• Agency Client Profitability: How Founders Eliminate Vampire Clients & Stop Scope Creep: finding the clients that cost more than they bring in.
• Agency 1099 Contractor Bookkeeping: How Founders Control Freelancer Costs & Avoid IRS Penalties: freelancer costs and 1099-NEC filing.
• Case Study: How Shoptalk Got Exit-Ready for Its Acquisition by Dept: how a creative agency prepared its books for buyer due diligence.