Guide to SaaS Revenue Recognition and Deferred Revenue in SaaS

Deferred revenue is earned when a business performs its end of a contract after payment has been received. A golf club charges its members SAR 120 in annual dues, which are levied right away when a member registers to join the club. The club would credit SAR 120 in deferred revenue and debit SAR 120 in cash.

You accepted cash in advance of doing a job during the month and initially recorded it as a liability. By the end of the month you earned some of this prepaid amount, so you reduced the value of this liability to reflect what you actually earned by the end of the month. To do this, Unearned Fees was debited for the amount earned and Fees Earned was credited to increase revenue by the same amount.

Deferred revenue examples

If you are performing revenue recognition on spreadsheets, it is time to to move to an online accounting software solution that is built for SaaS revenue recognition. And for the private US companies out there, don’t forget that ASC 606 must be adopted in 2019. As you’ll see, though, the formulas become quite complex to handle the different date logic. First, you have no idea about the financial performance of your SaaS business when in one month you have $100K of subscription revenue and in the next month you have $30K of subscription revenue. More importantly, it’s difficult to manage the financial performance of your business without proper SaaS revenue recognition. The good and bad news in the new revenue recognition guidance is that it is a framework.

After the services are delivered, the revenue can be recognized with the following journal entry, where the liability decreases while the revenue increases. Another consideration is that once the revenue is recognized, the payment will now flow down the income statement and be taxed in the appropriate period in which the product/service was actually delivered. A future https://business-accounting.net/top-5-best-software-for-law-firm-accounting-and/ transaction has numerous unpredictable variables, so as a conservative measure, revenue is recognized only once actually earned (i.e. the product/service is delivered). Different business models may have different methods for recognizing deferred revenue. It’s important to understand your business model and how deferred revenue is recognized under that model.

What are some examples of deferred revenue becoming earned revenue?

We will use different examples of deferred revenue to deal with the different aspects each time. When a customer pre-pays a company for a service that the company will perform in the future, the company experiences deferred revenue. Both transactions above for deferred revenue are essentially the same, so the discussion will cover only the first one. The difference is that a landlord who deals in rent may prefer to name the accounts to better suit the rental income business. If you have received revenue, it doesn’t necessarily mean it has already been earned. Often, you can deal with deferred revenue – something most SaaS subscription companies are familiar with.

In all the scenarios above, the company must repay the customer for the prepayment. On the other hand, advance receipt of revenue improves the Bookkeeping for Nonprofits: Best Practices, Tips, Resources, FAQs company’s liquidity position. A company can also manage its payables in a good manner & it can stay unexposed to the risk of doubtful debts.

What is SaaS Revenue Recognition?

These are the two adjusting entries for deferred revenue we will cover. Deferred revenue accounting can be complex, but there are some best practices that can help you stay on top of it. I’ve been a SaaS CFO for 8+ years and began my career in the FP&A function. I hold an active Tennessee CPA license and earned my undergraduate degree from the University of Colorado at Boulder and MBA from the University of Iowa. I offer coaching, fractional CFO services, and SaaS finance courses.

• Assume the same facts as Example 2, except that Customer pays Target the contract price in four installments of $250 at the end of each six-month period.
• The books are maintained on an accrual basis & hence, you can only realize something accrued.
• When building a financial model, analysts may use historical deferred revenue trends to forecast future revenue growth potential.
• As soon as the goods or services are delivered or performed, the deferred revenue turns into the earned revenue.

Identify the services or goods for which you have already received payment but which you should still deliver till the end of the reporting period. As you identify these transactions, it’s high time for your accountants to calculate and record the amount of the deferred payment. Whether your accountant is recording subscription correctly or not, as a SaaS founder or leader, you must understand the concept of SaaS revenue recognition and deferred revenue. If you do not know your revenue recognition policies, ask your accounting team today.