2 min lesson
Prepaid credits and commitments
Use two rows in "Prepaid credits and commitments" to state the practical decision rules.
Step 1 of 3
Prepaid credits and commitmentsdeferred revenue with a meter
- Event
- Customer buys $50k of credits
- Cash / billing
- Invoice $50k
- Revenue
- $0 recognized
- Balance sheet
- Deferred revenue +$50k
- Event
- Customer consumes $12k of usage
- Cash / billing
- No new invoice
- Revenue
- $12k recognized
- Balance sheet
- Deferred revenue −$12k
- Event
- Commitment period ends, $5k unused
- Cash / billing
- No invoice
- Revenue
- Breakage recognized per estimate
- Balance sheet
- Deferred revenue −$5k
| Event | Cash / billing | Revenue | Balance sheet |
|---|---|---|---|
| Customer buys $50k of credits | Invoice $50k | $0 recognized | Deferred revenue +$50k |
| Customer consumes $12k of usage | No new invoice | $12k recognized | Deferred revenue −$12k |
| Commitment period ends, $5k unused | No invoice | Breakage recognized per estimate | Deferred revenue −$5k |
Prepaid credits are deferred revenue drawn down by rated consumption, not by the calendar.
A committed-spend deal - customer promises $600k over the year, drawing it down by usage - combines both worlds. The commitment is recognized as it is consumed and any minimum that goes unused at period end is a true-up you have to book.
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Full explanation
True-ups and breakage
True-ups and breakagethe unused portion
- True-up: when actual usage exceeds a committed minimum, you bill and recognize the overage for the period it occurred.
- Breakage: the portion of prepaid credits a customer is not expected to use. You estimate it and recognize it in proportion to the pattern of actual redemptions, rather than waiting for expiry.
- Re-estimation: breakage is an estimate that you revisit each period as redemption behavior becomes clearer, which can move recognized revenue up or down.