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 subscription revenue accounting, 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 membership revenue recognition contributes to the reliability of that data.

Why is revenue recognition important for subscription billing?

Taking into consideration balance sheets to income and financial statements, revenue recognition is a subscription accounting method that 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 membership revenue recognition allows you to speak confidently about your subscription business’ performance and growth trajectory.

How does revenue recognition work?

An example of membership 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 membership 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.

This is a subscription accounting method from the GAAP and International Financial Reporting Standards (IFRS). The GAAP and IFRS have revised their accounting standard on revenue recognition several times to improve the reporting of financial statements, with the latest requiring ASC 606 compliance. Learn more about the U.S. government's position on revenue recognition and 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 subscription 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. 

Revenue recognition FAQs

What is revenue recognition?

Revenue recognition is a Generally Accepted Accounting Principle (GAAP) that specifies how and when you recognize revenue, helping subscription businesses separate actual income from deferred revenue.

When should revenue be recorded?

Contrary to traditional models where service delivery happens at the transaction moment, subscription businesses recognize revenue when the cash has been earned and not just collected.

Can you recognize revenue when you invoice?

Under accrual accounting, revenue is recognized when it is earned. Revenue for subscription services remains deferred during invoicing and is recognized or accrued once the consumer receives the service within the subscription period. 

What is the revenue recognition principle?

The revenue recognition principle is a key feature of accrual accounting that indicates that companies recognize revenue as it is earned and not when they receive payments. 

What is revenue recognition ASC 606?

On May 28, 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued the Accounting Standards Codification (ASC) 606, a new framework for companies to recognize revenue from contracts with customers across different industries and business models.

Who does ASC 606 apply to?

ASC 606 affects all public and private businesses that enter into contracts with customers.

What are the five steps for recognizing revenue according to ASC 606? 

The ASC 606 establishes the following model for revenue recognition:  

1. Identify the contract with a subscriber

2. Identify the performance obligations

3. Determine the transaction price

4. Allocate the transaction price

5. Recognize revenue

How do successful subscription businesses ensure accurate revenue recognition?

A revenue recognition platform is key for accurate and timely accounting. Successful subscription brands automate and streamline accounting processes to minimize errors and ensure compliance with ASC 606 and IFRS 15 standards. 

How do you record subscriptions in accounting?

The initial payment for a subscription service is typically allocated to a deferred revenue account. As each billing period occurs and the performance obligation is met, the portion of the upfront payment for that billing period can be moved over and recorded as recognized revenue.

How to audit revenue recognition? 

There are two main stages of a revenue audit: Testing the revenue accounts on your income statements and examining your accounts receivable on the balance sheet. Auditors may check for revenue recognition issues like side agreements and channel stuffing.