Recognize revenue over the service period
A customer who pays for a year in January receives service through December. Under accrual accounting, you record the payment as deferred revenue, a liability, and release one twelfth each month. Monthly plans are simpler because the period matches the cash. Keep a schedule showing each annual plan, start date and the amount released, and tie its total to the deferred revenue balance.
From processor payouts to bookkeeping
Stripe or another processor pays you after fees, refunds and disputes. Do not record the payout as revenue. Record gross charges, then fees, refunds and chargebacks as separate items. Tools that summarize the processor data into journal entries can help, but compare the monthly total to the processor's balance report.
MRR and churn are not accounting numbers
Monthly recurring revenue, churn, and customer lifetime value are operating metrics. They are valuable, but they are calculated from subscription data, not your ledger. Still, check that revenue per the ledger roughly matches MRR plus one-time items. A big gap can mean billing errors, free trials counted as paid, or discounts not captured.
Refunds, credits and free trials
Refunds reduce revenue. Account credits given for service problems may also reduce revenue, or may be recorded as customer credits until used. Free trials usually produce no revenue. Document your refund policy and use it consistently. Annual plan refunds can be large, and they should reduce the deferred revenue balance correctly.
Sales tax, costs and compliance
Whether digital goods or software subscriptions are taxable differs a lot among states and countries, and thresholds for registration change. Review where your customers are, check the current rules with the relevant agencies or a CPA, and record tax collected as a liability. Hosting, support, payment fees and contractor development are costs to track. Some software development costs may be capitalized, which is a topic for your CPA.
Finally, reconcile three things monthly: the processor balance, the bank balance and the deferred revenue schedule. If all three agree, you can trust your numbers when you plan hiring or raise prices.
A monthly close for recurring revenue
A tidy close list for this kind of business has five steps. Pull the processor reports, post gross charges, fees and refunds, update the deferred revenue schedule, reconcile bank and processor balances, and review new, upgraded and cancelled plans. Compare the revenue in the ledger with the subscription system. Differences tend to come from timing, discounts and manual invoices, and they are easiest to fix soon after the month ends.
Track customer acquisition cost, churn and gross margin alongside the books. Investors and lenders will ask for them. Keep a contract file for larger customers, with renewal dates and special pricing. As revenue grows, ask your CPA when to move from simple to more formal revenue recognition practices, since larger contracts raise more complex questions.
Common questions
Do I have to use accrual accounting?
Not always, but accrual gives a truer view with annual plans. Ask your CPA what is allowed and wise for your size.
How do I record a failed renewal?
No revenue is earned for a period that was not paid. Reverse any invoice that remains open after your grace period.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.