--- title: "Deferred Revenue for SaaS Companies, Explained | MCC" description: "How annual and multi-year software plans create deferred revenue, with a worked journal entry, a release schedule and a way to reconcile the balance each month." url: "https://mcc-solutionsnj.com/bookkeeping/guides/deferred-revenue-for-saas-companies-explained" --- Bookkeeping guide · Updated October 26, 2026 # Deferred Revenue for SaaS Companies, Explained When a customer pays for twelve months of software on day one, only one month of that cash is earned. The other eleven are a promise you still owe, and the books have to show it that way. By [Matthew Coleman](/about), MCC Solutions Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Owner contribution or loan](/bookkeeping/guides/owner-equity-and-capital-contributions) · [Closing entries and retained earnings](/bookkeeping/guides/closing-entries-and-retained-earnings) · [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) **Free tools:** [Current ratio calculator](/bookkeeping/current-ratio-calculator) · [ROI and payback calculator](/bookkeeping/roi-and-payback-calculator) [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## A worked example A customer buys an annual plan for $1,200 and you invoice it on January 1. The invoice records $1,200 as money owed to you and $1,200 as deferred revenue, which is a liability, not income. When the customer pays, cash goes up and the amount owed to you goes down. Revenue is still zero. At the end of January you move $100 from deferred revenue to subscription revenue. You make the same $100 entry each month. After six months, $600 has been earned and $600 remains in deferred revenue. After twelve, the balance is zero and the full $1,200 has been earned. ## A schedule makes it routine Keep one row per contract: customer, start date, term, total billed, the monthly release and the amount still unearned. Add up the unearned column and it should equal the deferred revenue balance in your books. If it does not, one of the two is wrong, and you have found the problem early. Many owners post one summary entry each month rather than one per customer, with the schedule as the support. Whichever way you post it, do it on the same day of every close. The free SaaS revenue schedule template builds this view from your contract list. ## Cancellations and refunds What happens to the unearned part when a customer leaves depends on your contract and your refund policy. If you refund the unused months, the refund reduces deferred revenue, not revenue you have already earned. If the contract is non-cancellable and nothing is refunded, how and when the rest is recognized follows your accounting policy. Decide the treatment once, write it down and apply it the same way every time. Your CPA should confirm it, because the same cash can be treated differently under different terms. ## Multi-year deals and upgrades A customer who prepays two or three years creates two kinds of liability. The part you will earn in the next twelve months is a current liability. The rest is long-term. Your reports should split them, since lenders and buyers look at working capital. A mid-term upgrade changes the monthly amount from the upgrade date forward. Add a new line to the schedule from that date rather than rewriting the old one, so the history stays readable. ## Reconcile it every month Your billing system probably reports unearned or deferred revenue. Compare that figure to your books each month. Small differences usually come from the timing of invoices, credits that were issued but not applied, or a plan change entered in one place only. Large ones deserve a customer-by-customer look. If you are not sure whether your books should follow accrual accounting and the revenue recognition standard used in US generally accepted accounting principles, ask your CPA. It often depends on who will read your statements, such as a lender or an investor. ## Common questions **Is deferred revenue an asset or a liability?** A liability. It is cash or a bill for service you have not yet delivered, so it is something you owe until you deliver it. **Do I need deferred revenue with cash-basis books?** Cash-basis books record money when it arrives and skip it. Investors, lenders and buyers often expect accrual books for a software company, so ask your CPA which you need. **Is deferred revenue taxed when I receive the cash?** Tax treatment can differ from the way your books record it. This is a question for your CPA, not something to guess. 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. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) [### QuickBooks Online Monthly bookkeeping, cleanup and reconciliation in QuickBooks Online for New Jersey small businesses. Your account stays in your name. QuickBooks →](/bookkeeping/software/quickbooks-online)[### Square, Stripe and payment processors How sales from Square, Stripe, PayPal and other processors should flow into your accounting software, and why deposits never match sales. Square & Stripe →](/bookkeeping/software/square-and-stripe) More guides - [MRR vs Recognized Revenue: What Is the Difference?](/bookkeeping/guides/mrr-vs-recognized-revenue-whats-the-difference) - [Annual vs Monthly Billing: What It Does to Cash and Books](/bookkeeping/guides/annual-vs-monthly-billing-cash-and-books) - [SaaS Month-End Close: A Checklist for Software Companies](/bookkeeping/guides/saas-month-end-close-checklist) - [SaaS Metrics a Bookkeeper Can Hand the Founder](/bookkeeping/guides/saas-metrics-a-bookkeeper-can-hand-the-founder) Free tool - [Bookkeeping health check](/bookkeeping/health-check) Related - [SaaS bookkeeping](/bookkeeping/saas-bookkeeping) - [SaaS revenue schedule (Excel)](/bookkeeping/templates/saas-mrr-and-deferred-revenue-schedule) [All guides](/bookkeeping/guides) Reach small business owners, freelancers and bookkeepers who read this guide: [advertise here](/advertise#bookkeeping). Do it yourself ### Monthly KPI Dashboard Workbook Type in each month's revenue, costs, receivables and cash, then pick a month and see the KPIs and charts that matter, with change from last month and the same month last year. [See what's inside ($29)](/toolkits/monthly-kpi-dashboard-workbook)14-day full refund Tallyfinch ### Books you keep on your own computer Tallyfinch does invoices, bills, bank import, reconciliation and the main reports, in a file you own. $99 once, then $5 a month for updates; the app keeps working if you stop the plan. It does not do payroll or sales tax filing. The free download records up to 60 entries. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) [Download it free](/tools/pro/trial/mccBooks) [Compare the three apps](/software) ## Rather have us keep the books? Ask for a quote. [Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)