Those of you planning to start your own business might be wondering: What is ASC 606? I've heard the term before, but what does it really mean?

Issued in May 2014, ASC 606 is a new revenue recognition standard jointly set by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). The main goal of ASC 606 is to standardize how businesses across industries recognize and record revenues.

For example, let's say companies A and B sell the same car at the same price — $9000. Now let's assume the down payment is also the same in each case — $3000. And so are the 12 equal monthly installments of $500. Now, A might show the total sale value of $9000 in its books as revenue in the first month itself, while B might break up the revenue to reflect the actual amount received each month.

To avoid such accounting discrepancies, and to make it easier for investors, consumers and other entities to compare financial statements, the ASC 606 standard was introduced. ASC 606 affects all businesses — be it public, private, or non-profit — that enter into contracts with customers to provide goods or services. ASC 606 offers a five-step model that companies must follow to recognize revenue:

• Step 1: Identify the contract(s) with the customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the total transaction price
• Step 4: Allocate a transaction price to each performance obligation
• Step 5: Recognize revenue as or when the entity satisfies a performance obligation

Each business will, of course, have different ways of tacking each step. However, these steps provide a fair summation of how companies can expect to identify and recognize revenue as per ASC 606.