Property management companies, or individuals who own real estate, may take advance rent payments. For items like these, a customer pays outright before the revenue-producing event occurs. The distinction between different metrics like MRR, ARR, cash, and revenue trips up even the most seasoned founders.

There are several industries where prepaid revenue usually occurs, such as subscription-based software, retainer agreements, airline tickets, and prepaid insurance. Companies using accrual accounting method need to adhere to https://www.bookstime.com/what-is-unearned-revenue revenue recognition principles proposed by Generally Accepted Accounting Principles (GAAP). The method states that companies may recognize revenue and income only in the same accounting period in which they were earned.

Subscription services

Deferred revenue (aka unearned revenue) gets recorded on a company’s balance sheet as a liability. Trying to convert unearned revenue into earned revenue too quickly, or not using a deferred revenue account at all, can be classified as aggressive accounting. If revenue gets posted to the income statement too early, it can overstate actual sales revenue. Say a company has a balance of unearned revenue for services it intends to provide within a year, this balance is considered a current liability and would decrease the working capital.

Understanding how and when to recognize your SaaS revenue isn’t something you can just wave off and hope for the best. It’s vital you set your revenue recognition right, so you can protect both your business and your customers and confidently reinvest in growing your company. Let’s move on to Company B, another CRM software https://www.bookstime.com/ provider who develops a SaaS product. Instead of a one-time charge like Company A, though, Company B charges a $10,000 subscription fee each year for access to their service, and most customers pay for the entire year up front. Say Company A releases a new version in January, and the new version costs $10,000 upfront.

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In summary, unearned revenue is an asset that is received by the business but that has a contra liability of service to be done or goods to be delivered to have it fully earned. And this is a piece of information that has to be disclosed to complete the image about the financial situation at that moment in time. Unearned revenue can provide clues into future revenue, although investors should note the balance change could be due to a change in the business. Morningstar increased quarterly and monthly invoices but is less reliant on up-front payments from annual invoices, meaning the balance has been growing more slowly than in the past. Note that when the delivery of goods or services is complete, the revenue recognized previously as a liability is recorded as revenue (i.e., the unearned revenue is then earned). Service-based industries that contract with buyers to perform regular maintenance or routine service often charge in advance and as a result have unearned revenue.