Understanding Revenue Recognition

Deferred Revenue refers to money received before services/products are delivered. 

Revenue recognition (“rev rec”) refers to the process of moving deferred revenue into actual revenue, in accordance with financial rules like ASC 606. A typical example would be the purchase of an annual subscription - the customer pays the full yearly subscription fee upfront, but revenue should only be recognized on a monthly basis as the service is delivered throughout the year-long billing period.

Revenue recognition is an essential part of financial reporting, ensuring that revenue is recorded in the correct accounting periods. When using Paddle, you will need to follow the below steps to accurately recognize revenue.

This guide is for a “simple” SaaS subscription with straight line revenue recognition. Any complexities including performance obligations and guidance under ASC606/IFRS 15 should be discussed with a financial professional.

Required Data from Paddle Reporting

To calculate revenue recognition, you will need the following three data points from Paddle’s reporting:

1. Billing Start Date – The date when the subscription or product access begins.

2. Billing End Date – The date when the subscription or access period ends.

3. Amount of Revenue Earned – The total amount before any buyer discounts.

Additionally, you will need to calculate the following fields:

• Revenue Earned per Day – The total revenue divided by the number of days in the billing period.

• Days Earned in Initial Period – The number of days from the start date to the end of the first month.

• Revenue Earned per Month – The revenue allocated to each month, calculated using the actual number of days in the month.

If you are a Paddle Classic customer, not all of the required data points are available self serve - please reach out to our Customer Support team at sellers@paddle.com and request access to our enhanced reporting. This can be delivered to you by SFTP. 

If you are a Paddle Billing customer, you can use the Transactions report and the Adjustments reports from the Reports tab in the Paddle Dashboard. 

Key Considerations

• Transaction Date: The date when the purchase occurred.
• Billing Term: The start and end date of the subscription or service.
• Transaction Month: The month in which the transaction took place.
• Revenue Recognition Total: This is calculated as the subtotal minus any discounts. Note that revenue recognition should be based on the gross amount, including the Paddle fee, according to accounting standards.

Revenue Recognition Example 1: Monthly Subscription

Scenario: A customer purchases a $10 monthly subscription on 27th November 2025.

Revenue Recognition Example 2: Annual Subscription

Scenario: A customer purchases a $100 annual subscription on 27th November 2025.

Monthly Breakdown:

Handling Adjustments (Refunds and Chargebacks)

Adjustments describe a post-billing change to a billed or completed transaction. Refunds, Chargebacks and Chargeback Reversals are all classed as Adjustments in Paddle. 

Adjustment information can be obtained by downloading an Adjustment report in the dashboard, or by polling the Adjustment API. The ‘action’ value gives information about what kind of adjustment was made (e.g. refund, chargeback, credit etc.)

Adjustments can be factored into your revenue recognition by inputting a negative line item during the period when they occur. 

Adjustment Example: Refund for Annual Subscription

Scenario: A customer purchases a $120 annual subscription on 1st January 2026. On 1st March 2026, the customer is granted a refund for the time outstanding on their subscription.

Monthly Breakdown:

Note that once the refund occurs in March, the anticipated revenue amount is negated each month by the refund. 

Automating Revenue Recognition

We recommend transitioning from manual calculations to automation using Paddle’s APIs. Large manual files can become difficult to manage and prone to errors. Automating revenue recognition using Paddle’s API provides a more scalable and reliable solution.

Next Steps:

1. Start by manually calculating revenue recognition using the provided examples.

2. Move towards leveraging Paddle’s API to obtain the necessary values to programmatically automate calculations and reduce manual effort.

3. Ensure compliance with accounting standards by recognizing revenue based on the gross amount.

By following these guidelines, Paddle customers can ensure accurate and reliable revenue recognition for their business.