Most of your clients pay within the allowed time period, but some-due to issues with the payment system, a forgetful manager, the invoice hitting the spam folder, etc.-do not pay on time. Your company bills clients at the end of the month for the services you’ve provided during the month. GAAP standards stipulate that you should move $7500 at the end of each period into your revenue account and keep the remaining unearned subscription revenue in a deferred revenue account as you have not yet earned the money.Ģ. Since you must provide services to these clients for an entire year and your income statements are drafted monthly, U.S. You have 10 clients that take advantage of the discount.

Your company offers a discount to clients that pay their bill annually instead of monthly. In the case of a subscription revenue stream, this means when you have fulfilled your part of the service agreement.Ĭonsider the following two subscription revenue examples to make this point clear.ġ. Matching Concept Examples for SaaS AccountingĪccording to many tax authorities, SaaS companies must use the accrual accounting system, which stipulates that you record revenue when it is earned, i.e., the revenue recognition principle. The matching concept or revenue recognition concept is not used in the cash accounting method. This is the system used by individuals when budgeting household expenses and by some small businesses. In the cash accounting method, revenues and expenses are recognized when cash is transferred. Accrual accounting entries require the use of accounts payable and accounts receivable journals, as well as a few others for deferred revenue and expenses, depreciation, etc. This is done by following the matching principle. Expenses are similarly recognized when they are incurred. This usually will happen before money changes hands, for example when a service is delivered to a customer with the reasonable expectation that money will be paid in the future.

In the accrual accounting method, revenue is accounted for when it is earned. Cash Accounting Accrual Accounting Method This provides auditors with a so-called apples-to-apples comparison of a company’s financial picture that is more transparent across industries.Īccrual Accounting vs.

A company should recognize revenue in the period in which it was earned, and not necessarily when the cash was received.įor a subscription SaaS provider, this can mean breaking up the money received from an annual subscription into the monthly periods as the services are provided. Revenue recognition concept: This principle refers to the period and manner in which a company realizes its income. This means that expenses should be matched to the revenue they generate and therefore be shifted into the period in which the revenue was earned instead of being recorded in the period they were paid for. Matching concept: This principle stipulates that accountants should record all revenue and expenses in the same reporting period. GAAP (Generally Accepted Accounting Principles) and should be used by any entity following the accrual accounting system. The matching principle and the revenue recognition principle are the two main guiding theories underlying accrual accounting.

Matching principle accounting