Accrued revenue for SaaS companies: How to record it 

What is accrued revenue (and why does it matter)?

Accrued revenue is the income a business has earned by delivering a product or service, even if the customer hasn't been invoiced or paid yet. It's about recognizing revenue when the work is done, not just when the money comes in. 

This approach aligns with the matching principle in accrual accounting, which states that revenue should be recorded in the same period it was earned, regardless of when the cash changes hands.

For SaaS and subscription businesses, accrued revenues are particularly important. Many SaaS companies operate on a subscription model, where customers pay periodically (monthly, quarterly, annually) for ongoing access to software or services. 

Revenue might be earned gradually over the subscription period, even if billing happens upfront or in arrears. Think about upgrades or downgrades mid-cycle, add-on purchases, or even one-time fees for setup or migration. 

In these scenarios, the revenue is earned as the service is provided, leading to accrued revenue until the billing cycle catches up. Properly accounting for it gives a more accurate picture of the company's performance during a specific period.

Can accrued revenue ever be negative?

Generally, no. Accrued revenue itself cannot be negative. It represents earned revenue for which payment is yet to be received. 

If a situation arises where a customer overpays or you need to issue a refund before recognizing the full revenue, it would typically be handled through contra-revenue accounts or adjustments to deferred revenue, rather than negative accrued revenue.

Note: Tracking accrued revenue is key for understanding your SaaS performance metrics. It's recorded in specific asset accounts in your SaaS chart of accounts. 

Plus, proper recognition of earned revenue, including accrued revenues, is vital for calculating your net revenue retention (NRR), showing true growth from existing users, regardless of payment timing. 

Accrued revenue vs. deferred revenue

As we’ve learned, how and when to recognize revenue is crucial for SaaS businesses. Two key concepts that often get confused are accrued revenue and deferred revenue. Let's break down some key differences:

Note: Want to learn more about unearned revenue and deferred revenue? Curious to know if deferred revenue is a liability? Check out our dedicated blog posts on these topics for a fuller picture. 

How do you record accrued revenue?

When you've earned revenue but haven't yet billed the customer, you need to make an accrued revenue adjusting entry. On the financial statements, accrued revenue appears as a current asset on the balance sheet. 

So, is accrued revenue an asset? Yes, it's a current asset representing earned but unbilled revenue.

Once you issue an invoice to the customer for this earned but unbilled amount, the accrued revenue is then reclassified. It moves from the "accrued revenue" asset account to "accounts receivable," another current asset. Accounts receivable specifically tracks the money owed to you from issued invoices. 

When the customer finally pays the invoice, the accounts receivable balance decreases, and your cash balance increases. The initial recognition of revenue, however, happened when the service was provided or the goods were delivered, thanks to the accrued revenue entry.  

Real-world accrued revenue examples

We’ll now share a few hypothetical scenarios relevant to SaaS and B2B startups to illustrate accrued revenue. Here are three examples:

Recording accrued revenue properly: A step-by-step guide

Accurately capturing accrued revenue is vital for a clear financial picture. Here’s a step-by-step guide to ensure you record it correctly:

Step 1: Identify revenue earned but not yet invoiced

The first crucial step is to pinpoint exactly which products or services your SaaS business has delivered or provided to customers for which you haven't yet issued an invoice. This requires careful tracking of service completion, delivery confirmations (even digital ones for software access), and understanding the terms of your agreements with customers. 

Look for instances where the performance obligation has been satisfied, but the billing event hasn't occurred yet.

Step 2: Calculate the accrued revenue amount

Once you've identified the instances of earned but unbilled revenue, the next step is to quantify the exact monetary value. This involves determining the price of the goods or services delivered based on your contracts or pricing agreements. 

Make sure you are calculating the revenue that has been earned within the specific accounting period you are reviewing.

Step 3: Record the adjusting journal entry

To formally recognize the accrued revenue, you'll need to make an adjusting journal entry in your accounting system at the end of the accounting period. This entry will increase your assets and your revenue:

This entry records the earned revenue on your income statement and increases Accounts Receivable (or Accrued Revenue) on your balance sheet.

Step 4: Reverse the accrued revenue entry once invoiced

When you finally issue the invoice to the customer for the services or goods related to the accrued revenue and officially record the accounts receivable, you must reverse the initial accrued revenue entry. 

This prevents you from counting the revenue twice, once when it was accrued and again when the invoice is paid. Here’s the reversing journal entry:

Separately, you will record the creation of the accounts receivable:

This sequence helps make sure that the revenue is correctly recognized in the period it was earned, and the asset transitions from accrued revenue to accounts receivable, which will eventually be reduced when the customer payment is received.

Common accrued revenue mistakes

Even with a solid understanding of accrued revenue, errors can happen. Here are some common mistakes and how to avoid them:

• Forgetting to reverse accrued entries: Failing to reverse the initial accrued revenue entry once the invoice is issued leads to double-counting of revenue. 
  
  Tip: Implement a strict process where the reversal of the accrued revenue entry is directly linked to the invoicing process. Many accounting systems allow you to schedule or automate this reversal.  

• Confusing accrued revenue with accounts receivable: Thinking they are the same. Accrued revenue is for revenue earned but not yet billed, while accounts receivable is for revenue that has been billed but not yet paid. 
  
  Tip: Maintain clear distinctions in your accounting records and use the correct account for each stage of the revenue cycle.

• Recording accrued revenue prematurely: Recognizing revenue before the service has been fully delivered or the product shipped. 
  
  Tip: Adhere strictly to revenue recognition principles (like those under GAAP). Make sure all performance obligations have been met before recording accrued revenue.

• Not clearly documenting accrued revenue: Failing to keep detailed records of the services provided, the dates they were completed, and the basis for the accrued revenue calculation.
  
  Tip: Maintain thorough documentation, referencing contracts, delivery confirmations, or usage reports to support all accrued revenue entries.

• Ignoring immaterial amounts: While focusing on significant figures is important, consistently overlooking smaller accrued revenue amounts can distort your financial picture over time. 
  
  Tip: Establish a threshold for materiality, but ensure even smaller amounts are reviewed periodically to avoid cumulative errors.

• Lack of regular review or reconciliation: Not periodically reviewing and reconciling your accrued revenue balances can lead to inaccuracies and missed reversals. 
  
  Tip: Implement a monthly or quarterly reconciliation process where the accrued revenue balances are reviewed against supporting documentation and invoicing schedules.  

How SaaS tools can automate accrued revenue

Manually tracking accrued revenue at scale can be hard for SaaS businesses with lots of customers, varied subscription terms, and usage-based billing models. The complexity increases with upgrades, downgrades, and mid-cycle changes. 

Finance teams need tools that offer automated journal entries, robust reporting capabilities, and seamless integrations with other systems to manage this effectively. Here are some categories of SaaS tools that can help automate accrued revenue management:

• Revenue recognition software: These platforms are specifically designed to automate the complexities of revenue recognition, including handling accrued revenue based on predefined rules and accounting standards. They often integrate with CRM and billing systems.  
• ERP (enterprise resource planning) Integrations: Connecting your ERP system with your billing or subscription management platform can automate the flow of data needed to identify and record accrued revenue accurately.
• Billing automation tools: Refined billing systems, especially those designed for subscription businesses, can often identify earned but unbilled amounts and trigger the necessary accrued revenue entries or provide reports to facilitate them. 
  
  Tools like Orb, a subscription management and billing platform handling recurring payments, can provide data crucial for identifying accrued revenue related to mid-cycle changes or usage.
• Subscription management platforms: These platforms manage the entire lifecycle of a subscription, providing insights into service periods, upgrades, downgrades, and usage. 
  
  This data is essential for correctly calculating and accruing revenue. Features like automated invoicing and the management of tiered pricing can feed into accurate accrued revenue calculations.

Unlock your SaaS company’s growth with Orb

We've been discussing what accrued revenue means for SaaS businesses – revenue earned but not yet billed. Effectively managing this aspect of your financials doesn't have to be a headache.

Orb is a done-for-you billing platform that helps SaaS companies handle accrued revenue with ease, leading to faster growth without the constraints of rigid billing systems. This is how Orb helps:

• Precise usage tracking with Orb RevGraph: Orb ingests and processes all your raw usage event data into the Orb RevGraph, creating a dependable record of when services are delivered. This granular data forms the foundation for accurate accrued revenue recognition.
• Customizable insights via Orb SQL Editor: By decoupling usage data from pricing metrics and offering the Orb SQL Editor, Orb allows you to query and analyze your usage data flexibly. You can gain specific insights into earned revenue based on your unique service delivery models, directly informing your accrued revenue calculations.
• Real-time monitoring for finance teams: Orb provides real-time visibility into customer usage, allowing finance teams to monitor earned revenue as it accumulates, even before invoicing. This up-to-the-minute understanding of accrued revenue aids in forecasting and financial planning.
• Frictionless financial integrations: Orb's extensible API allows for a smooth integration with your existing financial systems, including accounting software. Orb facilitates the accurate flow of accrued revenue data into your financial reports, simplifying reconciliation and compliance.
• Strategic forecasting with Orb Simulations: Orb Simulations allows you to test and predict the financial impact of different pricing strategies using real usage data. This includes forecasting how changes in pricing or usage patterns might affect your accrued revenue before you implement them live, allowing for more informed decision-making.

Ready to change how you manage accrued revenue and unlock faster growth for your SaaS business? Explore our flexible pricing options and find a plan that works for you.