What is Revenue Recognition?

Revenue Recognition is an accounting principle that specifies how and when revenue is to be recognized. Under the accrual basis of accounting, revenue is recognized when it is earned and realized, not necessarily when the cash is received.

For Startups: Proper revenue recognition is crucial for accurate financial reporting and compliance. It is a key area of scrutiny during due diligence, and getting it wrong can lead to restatement of financials and loss of investor trust.

For SaaS: For SaaS companies, this is particularly important. If a customer pays upfront for a one-year subscription, the revenue must be recognized on a straight-line basis over the 12 months of the contract. The unearned portion is recorded on the balance sheet as "deferred revenue."

Example: A customer pays ₹1,20,000 on January 1st for an annual subscription. The company recognizes ₹10,000 as revenue each month from January to December.