Three ways to recognize revenue for subscription billing
Revenue recognition is the process of accounting for the revenue generated by a company. It’s a key concept in financial accounting as it affects your company's financial statements–providing a clear picture of its financial health to investors and stakeholders.
Proper revenue recognition helps subscription businesses comply with ASC-606 and IFRS-15 accounting standards. These standards ensure that companies are consistent and transparent in their reporting.
When is revenue recorded?
This is a question many subscription business owners face, especially as the timing of billing–when invoices are generated–may create contract assets if revenue is recognized ahead of invoicing. There are three common ways revenue can be realized.
1. At the time of payment
This is most common for single purchases like one-time features. You deliver the product upon purchase and record the revenue immediately. Since the customer takes possession of the product instantly, revenue is recognized in the same accounting period as the payment was received.
2. Before payment is received
This method usually applies to service-based businesses, like consultancy companies. Revenue is recorded after the product delivery but before the payment is received. For example, a service delivered in June is recorded on June financial statements, even if the customer pays for it in August.
3. After payment is received
Contrary to traditional businesses, where products are sold and delivered immediately, subscription-based companies deliver their products repeatedly and must recognize revenue over time.
The subscriber pays upfront for a fixed period–usually monthly or annual, and the product is delivered over that time. Even though you receive the payment immediately, it should be gradually recognized as revenue until the service delivery period ends.
Subscription revenue recognition examples
To better understand revenue recognition for subscriptions, let’s review four examples of different subscription plan offerings.
Think about a video or music streaming platform. These companies typically recognize revenue every month. If a subscriber pays $10/monthly for their subscription plan, you would recognize $10 per month in your financial statements for as long as the customer is subscribed.
For yearly subscription services, like memberships or software licenses, the revenue is recognized throughout the subscription. If a customer pays $120 for an annual plan, you would recognize $10 in revenue monthly.
Similar to annual subscriptions, companies offering long-term contracts with customers recognize revenue over the contract duration. If a customer signs a three-year deal for $360, you would recognize $10 in revenue each month during three years.
For usage-based subscriptions, like cloud computing or pay-as-you-go services, you may recognize revenue based on the customer’s usage amount or activity. If a customer uses a cloud computing service for 100 hours at a rate of $1/hour, the company would recognize $100 in revenue.
These are simple examples that help you capture the essence of revenue recognition. However, it can be challenging, especially when supporting multiple revenue models.
How you recognize revenue will depend on the specifics of your contract, performance obligations, and the accounting standards your company must comply with.
Forget about complex revenue recognition
A revenue recognition software can help you ease the calculations by automating these processes. Recurly, for example, offers a revenue recognition solution for complex and straightforward revenue recognition requirements.
Here’s what revenue recognition for a $50,000 one-year contract for a subscription, professional services, and an initial setup fee looks like.
Recurly’s revenue recognition solution automates revenue reporting and month-end close for companies with complex revenue models as you:
Comply with ASC-606 and IFRS-15 with speed and confidence
Eliminate manual processes and automate revenue recognition rules
Streamline revenue management for complex, diverse pricing and product bundles
Gain new insights on plan performance, billing, and revenue recognition data