A contract asset is recognized when a company has transferred goods or services to a customer, earning the right to payment, but where the receipt of payment is contingent upon further conditions or actions being satisfied. For example, a company providing a project-based service may record a contract asset when it has performed work that will only be billed upon completion of certain milestones. Contract assets arise in situations where the timing of revenue recognition is ahead of the allowable billing under contract terms. As a result, accounting standards ensure that such rights to payments are captured on the company's balance sheet, typically under current assets.

In practice, a contract asset might appear in the financial statements during a month-end close process while reconciling accounts to ensure accurate reporting of revenues and receivables. For instance, if Company A delivers the first phase of a project in January but only invoices for the completed project in March, the value of the work completed by January end is captured as a contract asset until invoicing occurs. Understanding contract assets is important for financial reporting and for tasks such as balance sheet reconciliations.