{"id":86937,"date":"2025-02-14T03:23:53","date_gmt":"2025-02-14T03:23:53","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/bookkeeping-basics-for-saas-companies-managing-revenue-recognition\/"},"modified":"2025-02-14T03:23:53","modified_gmt":"2025-02-14T03:23:53","slug":"bookkeeping-basics-for-saas-companies-managing-revenue-recognition","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=86937","title":{"rendered":"Bookkeeping Basics for SaaS Companies: Managing Revenue Recognition"},"content":{"rendered":"


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On the surface, bookkeeping might not seem that complicated. A client or customer pays you money, so you record it on your books on the date it was paid.\u00a0<\/span><\/p>\n

Right? Wrong.\u00a0<\/span><\/p>\n

Because of the <\/span>Financial Accounting Standards Board\u2019s (FASB\u2019s) Accounting Standards Codification (ASC) 606<\/span><\/a>, it\u2019s mandated that companies use what\u2019s called revenue recognition. This means only putting something on your books as revenue as you\u2019ve actually earned the money.\u00a0<\/span><\/p>\n

As a result, it\u2019s key that any founder and finance personnel at any tech company understand what revenue recognition means, particularly for software as a service (SaaS) companies.\u00a0<\/span><\/p>\n

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Simplifying revenue recognition<\/span><\/h3>\n

Per the accounting principle of revenue recognition, you only record revenue on your books when you\u2019ve actually earned that money, not when the sum is paid.\u00a0<\/span><\/p>\n

If, for example, a customer pays for a year-long subscription in February, you don\u2019t record the full amount they paid on your books for February. Instead, you need to spread that total out over the months as the customer actually uses that subscription and, as a result, as you earn that money.<\/span><\/p>\n

If they pay you $1,000 in February for an annual subscription, you should split that into 12 months and record 1\/12 of the revenue in each month. In other words, you would record $83.33 of revenue from that customer in February, $83.33 in March, and so on \u2014 all the way until January of the following year.\u00a0<\/span><\/p>\n

As you satisfy the conditions of the contract with the customer month after month, you record that revenue. Until then, it stays on your books, but you mark it as deferred revenue.\u00a0<\/span><\/p>\n

Applying revenue recognition also benefits your tech company. Recording revenue as it\u2019s actually earned helps to keep your books as accurate and informative as possible. It prevents you from having what would otherwise look like spikes in certain months (as customers buy longer subscriptions) and dips in other months when you\u2019re actually consistently rendering service to that customer throughout the year.\u00a0<\/span><\/p>\n

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Extra considerations for SaaS companies<\/span><\/h4>\n

If you only sold one type of subscription (e.g., an annual one), revenue recognition would be fairly easy. But for many tech companies, this doesn\u2019t stay as simple as dividing subscription fees by 12 and distributing them across the coming year.\u00a0<\/span><\/p>\n

You also need to factor in:<\/span><\/p>\n