Revenue Recognition (ASC 606)
Revenue recognition is the accounting principle that determines when revenue is officially recorded. Under ASC 606, SaaS companies recognize revenue as the service is delivered — not when payment is received. A $12,000 annual contract paid upfront is recognized as $1,000/month over 12 months, with the undelivered portion as deferred revenue.
Why Revenue Recognition (ASC 606) Matters for SaaS Companies
Revenue recognition affects your reported financials, cash flow planning, and investor confidence. Getting it wrong can lead to revenue restatements — a credibility-destroying event for fundraising. For Seed to Series B companies, understanding the basics prevents painful surprises when you engage auditors for your first institutional round.
An Operator's Take
Most founders do not need to be ASC 606 experts. But they need to understand one thing: cash received is not the same as revenue recognized. I worked with a founder who sold a $120K annual enterprise contract and counted it as Q1 revenue. When the auditors came for Series A due diligence, they reclassified $90K as deferred revenue. That changed the growth narrative and delayed the round. Know the difference between cash and recognized revenue before your first audit.
Common Mistakes
What I see go wrong at Seed to Series B companies.
Recording revenue when cash is received rather than when the service is delivered. Annual prepayments must be recognized monthly.
Not tracking deferred revenue. If you collect $500K in annual prepayments, most of that is a liability (deferred revenue), not income.
Mixing professional services and subscription revenue recognition. Setup fees may need to be recognized over the contract period, not upfront.
What to Do This Week
Concrete steps you can take right now.
Confirm your billing system correctly handles deferred revenue for annual and multi-year contracts.
If you have not had a financial audit, consult a SaaS-experienced accountant before your next fundraise to ensure your revenue recognition is clean.
Separate recurring subscription revenue from one-time fees in your reporting. Investors want to see both clearly.
Related Resources
Frequently Asked Questions
When should SaaS companies start worrying about ASC 606?
Start tracking it correctly from day one — it is much harder to fix retroactively. The urgency increases at Series A when investors conduct financial due diligence. By Series B, clean ASC 606 compliance is expected. Most SaaS billing tools (Stripe, Chargebee) handle basic recognition, but complex deals (multi-year, bundled services) may need manual attention.
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