Unearned Revenue

SaaS businesses charge a subscription fee for the product on a monthly or annual basis. 

For those charging on an annual basis, the revenue generated at the beginning of the contract is considered unearned revenue.

Unearned revenue is revenue received before the service actually occurs.

The unearned revenue is not an asset, but rather a liability until it is earned.

It must be reported in the balance sheet as a liability.

As the revenue is earned, you must move it out of the unearned revenue account credit. 

This is typically done on a monthly basis.

In running a SaaS business it’s important to understand when to recognize revenue and how to account for it in the financial statements.

Contact your accountant to help set up your books properly at the start of the business.

 

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