What is revenue recognition?
Revenue recognition is the exact point when cash becomes revenue, i.e. when the service is completed and delivered.
In SaaS, that’s typically when the customer is granted access to your service.
But as your business grows and becomes more complex, it becomes less clear when exactly you should recognize revenue.
For example, imagine handling 1,000 clients every month, with a whole host of upgrades, downgrades and other complexities – each needing to be recognized.
During the sales process, revenue could potentially be recognized at many different points. So it’s necessary to define a precise point when cash becomes revenue.
That’s where the revenue recognition accounting principle comes in. It’s a key part of accrual accounting, stating that cash is only considered revenue once the product or service has been delivered in full. At that moment, the amount gets recorded in your account receivables.
But until that point is reached, the customer may still ask for a refund. If the money has already been spent, you risk creating major issues with your accounts.