5 Journal Entry Examples Every SaaS Accountant Should Know
Accounting for SaaS companies is often more complex than traditional businesses because revenue is recognized when it is earned, not when payments are made. This simple principle impacts nearly every aspect of the business, including cash flow, reporting, valuation, ASC 606 compliance, operational efficiency and strategic decision-making.
Inspiring confidence in the business means providing leadership, finance teams and investors with journals that can be traced back to individual contract lines.
What are the keys to empowering your business with clean financial data every department can count on? Here are the principles that drive SaaS accounting and five journal entry examples every accountant should know.
Revenue recognition for SaaS companies
ASC 606 is the gold standard for SaaS accounting and governs how revenue is recorded for subscription, usage-based and hybrid billing models. The majority of income for SaaS companies using these models isn’t earned at the same time it’s received, leading to a complex web of liabilities that can cloud a business’s true financial position.
There are many types of services SaaS companies offer that influence how they recognize revenue:
- Platform access. These payments typically come in the form of monthly subscriptions, where contract terms are fulfilled throughout a billing period.
- Cloud computing, storage, networking, analytics, development and security. These usage-based options are often paid for in advance and consumed over time.
- Tokens. Tools like ChatGPT run on tokens that are used long after they’re purchased. Revenue is only recognized when tokens are redeemed.
When is revenue recognized under ASC 606?
There are five key steps SaaS accountants need to be aware of for capitalizing revenue and recording it as earned. Together, all of them govern the flow of accounting data and influence how SaaS accountants must manage journal entries.
- Identify the contract. Accountants need to clearly articulate each contract component.
- Identify performance obligations. These are distinct goods and services that will be transferred in exchange for payments.
- Determine the transaction price. The cost of each good or service must be clearly noted.
- Allocate performance obligations to transaction price. A standalone selling price (SSP) is assigned to each obligation.
- Recognize revenue as obligations are fulfilled. When the performance obligations are fulfilled, the revenue is considered “earned” – regardless of whether payment has been received.
Key journal entry examples and best practices
To keep the flow of data across the order-to-cash cycle clean and audit-ready at all times, SaaS accountants need to master how they record and maintain the following journal entries. 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.
1. Deferred revenue
Deferred revenue is recorded when your business has been paid for services that have not yet been delivered per the terms of the contract. For SaaS companies, this most often comes in the form of subscriptions and other usage-based services.
Payments should be recorded on the ledger as a liability and tied directly to a performance obligation with an appropriate memo. When performance obligations are fulfilled, accountants need to issue an adjusting entry by debiting the deferred revenue and crediting revenue.
2. Accrued revenue
Accrued revenue arises when services have been delivered and revenue is earned, but an invoice has not yet been issued or payment has not yet been received.
While it is uncommon for SaaS companies to bill at the end of the month for subscriptions, they often deal with late payments and associated penalties. Because it’s undesirable for services to be suspended the moment a payment date is missed – especially if there’s a multi-month or rolling contract in place – accrued and deferred revenue will fluctuate from time to time.
There are many other 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.
SaaS accountants will need to debit and credit these journal entry examples in the opposite way that deferred revenue is handled.
3. Incremental costs
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 by the accounting team.
SaaS companies may also capitalize R&D costs if they are expected to be offset by deferred revenue streams rather than paid upfront.
Both of these journal entry examples introduce complexity for SaaS accountants that is very difficult to manage through traditional Excel spreadsheets. ERP-embedded financial strategies that automate data streams can completely mitigate downstream liabilities for compliance, auditing, reporting and reconciliation.
4. Depreciation
Like physical assets, software can also depreciate over time. In many cases, SaaS products may be intended to function for a limited amount of time before they are replaced, become obsolete or are progressively less relevant to evolving standards and practices.
SaaS accountants need to be aware of how their employer expects depreciation to be recorded for various assets. Software is often considered a “fixed-life intangible product” (FLIP), and straight-line depreciation may be the ideal way to simplify its value over time.
5. Taxes
Because SaaS revenue recognition is complicated by deferred and accrued revenue, calculating tax liabilities depends heavily on how previous journal entry examples are handled. In the case of an audit, auditors need to be able to trace tax data directly back to individual contract lines.
Spreadsheets and manual bookkeeping make it difficult for accountants to create accurate tax entries because any error in the chain affects all the calculations that follow. Catching and correcting mistakes can extend month-end closings by days or weeks and consume valuable resources. Worse, these activities will likely only reduce error rates to “acceptable levels” instead of eliminating them altogether.
The challenge of taxes highlights the value of embedding finance entirely within your ERP. SaaS companies that adopt this strategy through native integrations and SuiteApps benefit from uninterrupted data streams. That means maintaining audit readiness and real-time visibility across the business, which translates to effortless scaling and powerful reporting that positions leaders to take advantage of every emerging opportunity.
Revolutionize your financial strategy with Zone
SaaS CFOs and controllers rely on their accounting team to deliver accurate numbers that empower bold moves in dynamic markets. The journal entry examples above are just a few of the vital data sets accountants need to track to help drive growth and minimize risk.
Book a demo with Zone today, and discover how the power of true ERP-embedded finance can transform your business.