What is subscription revenue recognition?
To maximize revenue and capture more market share, subscription businesses need to understand the revenue recognition principle. Traditionally, revenue recognition is a generally accepted accounting principle (GAAP) that notes how you recognize revenue. In the case of subscriptions, revenue is only recognized and counted when the cash from a product or service, per the contract, has been earned and not just collected.
For example, a gardener’s services are completed by day’s end and $100 is expected, which means revenue is recognized after the job is completed. However, the money may not be received until weeks later. In subscription billing, your billing platform should be your source of truth and accurate revenue recognition contributes to the reliability of that data.
Why is revenue recognition important for subscription billing?
While it may seem largely the concern of finance teams, revenue recognition offers transparency into some of the most important aspects of any business. Recognize revenue too early and you may think you have more to invest than you actually do. Failing to recognize revenue correctly, however, may lead to missed opportunities to grow your business. Accurate subscription revenue recognition allows you to speak confidently about your business’ performance and growth trajectory.
How does revenue recognition work?
An example of revenue recognition is easiest to understand when customers pay upfront, like in the case of annual subscriptions. Let’s consider a wine club that charges $480 annually for subscribers to receive three bottles of wine every month. When do you recognize revenue?
If you’re wondering how to calculate revenue recognition, the answer is $480 annually divided by 12 months, which comes out to $40 of recognized revenue every month. Just because $480 has been paid from the get-go, doesn’t mean you’ve earned every penny of that amount. For example, if the subscription had to be canceled before that year is up, you would technically owe money to that customer.
The GAAP and International Financial Reporting Standards (IFRS) has revised its standard on revenue recognition several times to improve the reporting of financial statements, with the latest requiring ASC 606 compliance. Learn more about revenue recognition standards from the Financial Accounting Standards Board.
Recurly Revenue Recognition
With Recurly’s Revenue Recognition tool, you can access a revenue schedule export for faster, more accurate revenue accounting. This revenue recognition automation feature is ideal for subscription companies with standard revenue recognition requirements.
Subscription revenue recognition is more unique than most people’s basic understanding of revenue recognition. Recurring revenue, while reliable and stable revenue generation for subscription companies, makes a strong case for the time revenue is earned versus collected, especially with different subscription plans.