Lago Blog - The Complete Guide to Accrued Revenue for SaaS Companies

The Complete Guide to Accrued Revenue for SaaS Companies

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Managing revenue recognition accurately is essential for SaaS companies as the percentage of SaaS providers utilizing consumption-based pricing models has increased from 27% to over 60% in the past five years [1]. For organizations operating complex saas pricing models that blend subscriptions with usage-based components, understanding accrued revenue becomes critical for accurate financial reporting and business decision-making.

What is Accrued Revenue?

Accrued revenue is income a company has earned but hasn't yet received payment for. It's recorded when a business delivers a product or service before issuing an invoice or receiving cash. This accounting method ensures revenue is recognized when it's earned, not when payment arrives [2].

This concept is fundamental to understanding modern saas pricing models where service delivery often precedes billing cycles. This is especially important for companies with long billing cycles or delayed payments, such as consulting firms, SaaS providers, and professional service businesses [2].

Key Business Benefits

Accurate financial reporting: Following GAAP's revenue recognition principle helps provide a clearer picture of your company's financial health [2]
Investor confidence: Investors, lenders, and stakeholders rely on this information to assess whether a company has enough receivables to support obligations and determine profitability and growth potential [2]
Better business decisions: Proper accrued revenue tracking enables more informed strategic planning and resource allocation

Essential Revenue Recognition Principles

Revenue Recognition Principle

The revenue recognition principle requires you to record revenue when it's earned, not when payment is received [3]. This principle becomes especially important with modern billing automation for SaaS companies that operate hybrid pricing models.

For instance, a SaaS company offering annual subscriptions records revenue monthly as services are delivered, even if the customer paid upfront [3].

Matching Principle

The matching principle states you must record revenue at the same time you record expenses for a project. So, if installing software incurred technical and labor costs, list those expenses in the same period. You need to account for all expenses and revenue in the time span you provided a good or service [4].

Going Concern Principle

This principle is a cornerstone of financial statement preparation because it influences how assets and liabilities are valued. For SaaS businesses, this is especially relevant when considering recurring revenue streams and long-term contracts [5].

Recording Accrued Revenue: Step-by-Step Guide

When to Record Accrued Revenue

Accrued revenue is recorded at the end of an accounting period, typically monthly, quarterly, or annually, depending on a company's reporting cycle. Businesses using accrual bookkeeping must ensure all earned revenue is properly recognized before closing their books [2].

Journal Entry Process

Step 1: Identify Earned Revenue The first step is determining if the business has earned revenue it has not yet received [2]. This commonly occurs with:

Services completed but not yet invoiced
Subscription services delivered but billed quarterly or annually
Usage-based billing for saas requiring month-end calculation

Step 2: Create the Initial Journal Entry The typical journal entry for accruing revenue involves debiting the accrued revenue account on the balance sheet under current assets. This entry increases the total assets, reflecting the economic resource that the business owns (the right to receive money). Credit the revenue account on the income statement to recognize the income earned, which affects the company's profit and loss for that period [5].

Step 3: Record Billing and Payment Using double-entry bookkeeping, when you earn revenue but haven't billed for it yet, you debit Accrued Revenue (an asset) and credit Service Revenue (income). When you invoice the customer, you debit Accounts Receivable and credit Accrued Revenue. Finally, when your customer pays, you debit Cash and credit Accounts Receivable. This system helps balance your financial statements and accurately reflect revenue, receivables, and cash flows in appropriate periods [5].

Practical Example: SaaS Service Delivery

Let's say your SaaS company provided $5,000 worth of services in June but hasn't billed the customer yet. The journal entry would look like this: [followed by] suppose you bill the customer on July 1st and receive payment on July 15th [5].

Initial Accrual (June 30):

DateAccountDebitCredit6/30Accrued Revenue$5,000Service Revenue$5,000

Billing Entry (July 1):

DateAccountDebitCredit7/1Accounts Receivable$5,000Accrued Revenue$5,000

Payment Receipt (July 15):

DateAccountDebitCredit7/15Cash$5,000Accounts Receivable$5,000

SaaS Pricing Models and Accrued Revenue Complexity

Modern Billing Challenges

46% of SaaS companies implement hybrid models combining tiered pricing with per-unit pricing for specific resources [6][7], creating unique accrual challenges:

Variable consumption patterns: Monthly usage can fluctuate dramatically
Complex rate calculations: Progressive and tiered pricing structures
Multi-component billing: Combining subscriptions with usage charges

Usage-Based Billing Scenarios

For SaaS companies, deferred revenue most often comes in the form of subscriptions and other usage-based services [8]. However, accrued revenue scenarios are equally common:

End-of-period usage tracking: Services delivered but usage data still being processed
Milestone-based projects: Custom implementations or professional services
Overage billing: Usage exceeding prepaid allowances

Metered Billing for SaaS Complications

There are many circumstances in which an SaaS company may accrue revenue depending on its business model. For instance, if it provides customization, technical support, consulting or other services not included in the standard contract, these may be billed separately [8].

Modern metered billing for saas requires sophisticated tracking because:

Real-time usage data may have processing delays
Complex pricing tiers require careful calculation
Integration with multiple data sources can create timing differences

Best Billing Automation for SaaS: Addressing Accrual Challenges

Automation Benefits

Modern SaaS billing companies offer software that automates various billing tasks, from invoice generation to payment processing, reducing the potential for errors and ensuring that billing remains efficient and accurate [9].

Key Automation Advantages:

Reduced errors: Automated billing systems are the linchpins of precision in SaaS revenue models. They meticulously handle complex billing scenarios, effectively eliminating human errors [10]
Time efficiency: Time is conserved significantly with automated billing. This shift from manual to computerized processes frees up valuable team hours, redirecting focus towards strategic tasks. Imagine reallocating hours spent on manual billing to refining your product or enhancing customer experiences [10]
Revenue protection: Automation acts as a gatekeeper against revenue leakage [10]

Essential Features for Complex Billing

Real-Time Processing

Continuous usage data ingestion and processing
Automated rate calculations for complex pricing structures
Real-time revenue recognition capabilities

Integration Capabilities

Seamless connection with existing business systems
API-driven architecture for custom integrations
Automated journal entry generation for accounting systems

Compliance Support Advanced billing platforms ensure compliance with accounting standards while supporting complex pricing models. Automation simplifies revenue recognition by automating the calculations and journal entries required for accrued revenue, ensuring compliance with accounting standards and providing a clear picture of earned revenue, even if payment hasn't been received yet [5].

Consumption-Based Pricing Models and Accrual Accounting

Growing Adoption

With consumption pricing, 80% of customers report better alignment with the value they receive, according to Bain & Company research [11]. This shift toward consumption based pricing models creates new accrual complexities:

Variable Revenue Streams

Monthly consumption can vary significantly
Seasonal usage patterns affect accrual estimates
Customer growth directly impacts revenue calculations

Complex Pricing Structures The latest evolution of SaaS uses consumption-based models that calculate price based on measures of actual use, such as data ingested, messages sent, or hours used. There are many flavors of consumption pricing, ranging from pay-as-you-go to allowances that are burned down and limits that are capped [11].

Business Impact

Companies implementing consumption-based models experience, on average, 125% net dollar retention [1], but achieving these results requires accurate accrual accounting practices.

For companies leveraging these models, Lago provides comprehensive billing automation capabilities:

High-throughput processing: Processing up to 15,000 billing events per second, supporting real-time metering for demanding AI and SaaS workloads
Flexible pricing support: Supporting subscriptions, pay-per-use, prepaid credits, and add-ons, often for the same customer, with accurate automatic invoice generation

Accrued Revenue vs. Other Revenue Types

Accrued Revenue vs. Deferred Revenue

Although they sound similar, accrued revenue and deferred revenue are opposites in accounting. Accrued revenue is recognized before payment is received and is common in industries with long-term contracts and subscription-based services, such as SaaS and consulting [3].

Key Differences:

AspectAccrued RevenueDeferred RevenueTimingRecorded when a company has earned revenue but has not yet received payment [2]Received before services or products are delivered [3]Balance SheetClassified as an asset under accounts receivable [12]Treated as a liability since it represents unearned revenue [12]Common ExamplesServices completed but not billedAnnual subscriptions paid upfront

Practical SaaS Examples

Accrued Revenue Scenario: A SaaS company may acquire a customer who needs a service for the next six months. Under contract terms, the business may agree to deliver the service at $1,000 and send an invoice at month-end, payable on the 15th of the next month. The SaaS company will have $1,000 in accrued revenue from that customer [12].

Deferred Revenue Scenario: If a software company provides annual subscriptions but bills customers upfront, that payment is recorded as deferred revenue until the service is provided over time [3].

Advanced Implementation Strategies

Multi-Component Revenue Recognition

Under ASC 606, incremental costs of obtaining a contract (such as sales commissions) must be capitalized if the company expects to recover those costs through future revenue. For instance, if a commission is built into the price of a SaaS subscription contract that will be entered as deferred revenue, then this incremental cost needs to be properly amortized [8].

Documentation and Compliance

Essential Documentation:

Clear revenue recognition policies
Detailed contract terms and milestone definitions
Usage tracking and validation procedures
Regular accrual balance reviews and adjustments

Best Practices: It's better if you complete the accounting entries on the fly, then there's less chance that you'll make a mistake with the entries [13].

Technology Integration

Ideally, finance software should be embedded in your ERP – not just partially automated – to ensure data lineages remain error-free, secure, are tied to one source of truth across all departments and can be traced directly back to the contract [8].

Modern usage based billing systems like Lago address these integration needs by:

Providing API-first architecture for seamless ERP integration
Maintaining complete audit trails from contract to revenue recognition
Supporting real-time data synchronization across business systems

Managing Financial Statement Impact

Balance Sheet Effects

Accrued revenue is usually recorded as a current asset because the time between earning the revenue and receiving the cash after customer billing is generally less than one year or the company's operating cycle [14].

Income Statement Recognition

The income statement records revenue when it is earned, not when cash is received. This aligns with GAAP's revenue recognition principle, which requires businesses to match revenue to the period in which services or goods were provided [2].

Impact on Financial Reporting:

More accurate period-to-period performance measurement
Better alignment of revenue with business activities
Enhanced investor and stakeholder confidence

Cash Flow Considerations

Managing accrued revenue allows you to anticipate future cash inflows and outflows, aiding in cash flow management and budgeting. This is particularly vital in the SaaS industry, where subscription-based revenue streams can fluctuate [13].

Common Challenges and Solutions

Estimation Accuracy

Challenge: Accurately estimating unbilled revenue for complex pricing structures Solution: Implement robust usage tracking systems and establish clear estimation methodologies

System Integration

Challenge: Spreadsheets and manual bookkeeping make it difficult for accountants to create accurate tax entries because any error in the chain affects all calculations that follow. Catching and correcting mistakes can extend month-end closings by days or weeks [8]

Solution: Invest in integrated billing automation platforms that provide:

Real-time data processing and validation
Automated accrual calculations
Comprehensive audit trails and error detection

Compliance Management

Importance: Adhering to the revenue recognition principle is a basis for sound financial reporting. It ensures your business follows generally accepted accounting principles (GAAP) by recognizing revenue when it's earned, presenting accurate financial statements crucial for decision-making [13].

Industry Trends and Future Considerations

Market Evolution

The 2025 Monetization Monitor indicates 59% of software companies expect usage-based approaches to grow as a percentage of overall revenue, representing an 18% rise from 2023 [15].

This growth trend means more SaaS companies will need sophisticated accrual accounting processes to handle:

Increased billing complexity
Real-time revenue recognition requirements
Enhanced compliance and reporting standards

Regulatory Developments

As consumption-based pricing becomes more prevalent, expect continued evolution in:

Revenue recognition standards and guidelines
Automated compliance requirements
Enhanced audit and reporting standards

Conclusion

Accrued revenue management is fundamental for SaaS companies operating in today's complex billing environment. Many businesses rely on accrued revenue entries, especially in industries like consulting, SaaS, and professional services, where work is completed before invoices are sent. Service-based businesses contribute a significant amount to the U.S. GDP, highlighting the widespread need for accurate revenue recognition [2].

Success requires a combination of:

Clear understanding of accrual accounting principles
Robust processes for tracking and recording earned revenue
Advanced technology to handle complex billing scenarios
Compliance focus to meet accounting standards and investor expectations

SaaS companies using consumption-based pricing models have seen a compound growth rate of 22% since 2017 [16], demonstrating the business value of implementing sophisticated billing models correctly.

For companies ready to scale their billing operations, platforms like Lago offer comprehensive solutions supporting complex pricing models while maintaining accurate revenue recognition and compliance standards.

Frequently Asked Questions

Why is accrued revenue especially important for SaaS businesses? The SaaS industry's long-term success relies on maintaining customer subscriptions. Therefore, recognition of accrued expenses and revenue helps companies make operational decisions, such as current asset allocation and growth strategies, which can lead to customer retention and growth [13].

How do I record accrued revenue for usage-based billing? Step 1: Tender the service that generates accrued revenue. Step 2: Record a debit to accounts receivable for the earned revenue amount. Step 3: Record a credit to revenue to reflect the earned income. Step 4: Once payment is received, adjust entries by debiting cash and crediting accounts receivable [4].

What's the difference between accrued revenue and deferred revenue in SaaS? If a company delivers software services before billing the client, it records accrued revenue until payment is collected [3], while deferred revenue is rooted in the matching principle. When you invoice a company for a one-year subscription, you have not earned that revenue yet. You earn it over the term of the subscription, so you must "park" the revenue on the balance sheet.

How can billing automation help with accrued revenue management? Reliable billing software streamlines the billing process and minimizes errors, ensuring accurate invoicing. A SaaS company experiencing rapid growth will find that a scalable billing system can effortlessly handle an increasing number of transactions without compromising performance, supporting business expansion [10].

What accounting standards govern accrued revenue in SaaS? Accrued revenue is crucial for GAAP compliance. It offers a more realistic financial picture than simply focusing on cash on hand, promoting transparency and consistency in financial reporting [17]. Additionally, the deadline for private companies to comply with ASC 606 in the United States began January 1, 2019.

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Last updated on:

August 25, 2025

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