SaaS accounting is unique in itself. A B2B SaaS company's revenue generation and recognition methods defer from general accounting processes as they follow subscription models.
Deferred revenue is a key accounting concept in which a customer pays upfront for a year to access a certain B2B SaaS product. In this scenario, while the money has already been paid, it is not considered revenue until the company delivers the promised digital products or services.
When you have hundreds of subscribers opting for different plans and special discounts, accounting for deferred revenue can be overwhelming.
In this quick guide, I’ll explain how to calculate and account for deferred revenue in B2B SaaS and track income successfully.
Why is Deferred Revenue Important?
B2B SaaS companies follow different revenue recognition methods for accurate accounting. According to Younium, B2B companies can leverage accounts receivable software to automate managing money owed from their customers. These platforms help B2B businesses to streamline their business money management.
Let's examine how recognizing deferred revenue can enhance your B2B SaaS accounting accuracy.
- Helps You Stay Compliant: Governing organizations like FASB and SEC have set rules and guidelines to recognize and report revenue. Incorporating deferred revenue recognition in SaaS helps you fulfill a legal obligation and stay compliant.
- Improves Cash Flow Management: By understanding when to recognize your B2B SaaS deferred revenue, you can better manage your cash flow. You can confidently decide when and how you want to spend this cash.
- Facilitates Accurate Financial Reporting: Tracking unearned revenue provides for more accurate B2B SaaS financial reporting. Thus, you can measure your business performance more realistically.
- Enhances Financial Forecasting: Deferred revenue tracking tells you exactly when the advance payment in your account will be recognized as earning. This analysis facilitates better forecasting leading to better financial planning.
Is Deferred Revenue Considered a Liability or an Asset?
Deferred revenue is distinct from accrual accounting because the way income is recognized in both methods is different. However, unearned revenue is not the same as unbilled revenue (accrued revenue). Here, the payment has already been received from the client but it is not yet earned.
The obvious question here is, should we consider deferred revenue as a liability or an asset? Going by accounting principles, deferred revenue is always recorded as a liability. Although the customer has paid in advance, the money will be recorded as an asset only when you deliver the assured services.
Let’s say, a customer has made an advance payment for a year. This makes you liable to provide access to your digital product or services for 12 months. Thus, deferred revenue is a long-term liability. Advanced subscription management solutions are designed to track B2B SaaS deferred revenue and maintain accounting accuracy.
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How to Account for Deferred Revenue in B2B SaaS?
In industries like B2B SaaS, deferred revenue is a common and vital element. The formula to calculate deferred revenue is:
Deferred Revenue = Value of Invoices - Recognized Revenue
In B2B SaaS accounting, deferred revenue will be reflected in 3 major financial statements:
- Cash Flow Statement: You will account for the cash as it has been received.
- Profit and Loss Statement: The cash will be recognized as revenue over a period of time-based on the subscription duration.
- Balance Sheet: Unearned revenue is accounted for as liability. Till you ‘owe’ the services to your customer or client, this cash will be considered a liability.
To understand deferred revenue recognition better, let’s consider this example. A client has paid $2400 for a one-year subscription to your B2B SaaS product. When divided, the subscription would come up to $2000 per month.
Deferred revenue or unearned revenue will be recognized in a two-step process:
- Initial Recognition: When a customer or client prepays for a product, that amount will be recognized as unearned revenue. In the case of the example stated above, $2400 will be recorded as deferred revenue in your balance sheet.
- Revenue Recognition: As you deliver the digital product or service over the subscription period, you recognize a portion of the unearned revenue as income every month. This amount will be recognized as an asset in your financial statement.
According to the example, you would be deducting $2000 from deferred revenue every month. The same amount will be credited as revenue in the income column.
Conclusion
Tracking deferred revenue is critical for any business that works on the subscription model. When neglected, it may lead to an imbalance in the financial statement and pose a superficial picture of your company’s performance.
You can rely on a good accounting tool to not only track subscriptions but to record cash flow accurately. By accounting for deferred revenue accurately, you can present B2b SaaS growth realistically and impress stakeholders.
