Revenue Recognition in Zoho Billing
This feature is currently in Early Access. Reach out to our support team at support@zohobilling.com to enable this feature for your organization.
Revenue Recognition is a fundamental accounting principle that defines when a business should record revenue in its financial statements. It ensures that revenue is reported in the correct accounting period. Revenue is not recognized when cash is received, but when the service or product has actually been delivered to the customer.
For subscription businesses, SaaS models, and service-based organizations, customers often pay upfront for services that will be provided over days, weeks, or even years. If the full amount is recognized immediately, it would record more revenue than what was actually earned and would not reflect the true performance of your business.
This is why Revenue Recognition exists, it aligns revenue with delivery, giving your reports transparency, accuracy, and compliance with accounting standards such as ASC 606 and IFRS 15.
What is ASC 606 and IFRS 15?
ASC 606 (by the Financial Accounting Standards Board – FASB) and IFRS 15 (by the International Accounting Standards Board – IASB) are global accounting standards that define how and when revenue should be recognized.
They were introduced to create a consistent, transparent, and comparable framework for revenue reporting across different industries and countries.
Both standards follow the same core idea:
Businesses should recognize revenue only when they provide services to customers, in the amount they expect to receive.
To apply this principle consistently, ASC 606 and IFRS 15 prescribes a five-step revenue recognition model:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognize revenue when (or as) each performance obligation is satisfied
These standards form the basis for how revenue should be recorded in any modern accounting system. Zoho Billing applies these principles to ensure your revenue is recognized accurately and consistently. Here’s how:
- It splits revenue over the service delivery period.
- Ensures your reports reflect only earned revenue, not money received upfront.
How Revenue Recognition Works in Zoho Billing
Zoho Billing follows the same guidelines as ASC 606 and IFRS 15 to help you recognize revenue only when it is earned. Instead of recording it as revenue when an invoice is raised for a customer, Zoho Billing distributes the revenue based on your configuration across the actual service period automatically, ensuring that your reports always reflect earned revenue and not just the amount collected when an invoice is raised.
In Zoho Billing, when you receive an advance payment from your customer, the amount is recorded as a liability and credited to the Deferred Revenue account. This indicates that payment has been collected, but the service is yet to be delivered.
As the service is rendered over time, this amount is debited from the Deferred Revenue account and credited to the Recognized Revenue account, reflecting the revenue you have actually earned for that period.
If a customer cancels their subscription and a credit note is issued, the refundable portion is reversed. The amount is debited from the Deferred Revenue account and credited to the Accounts Receivable account, ensuring that your accounting is accurately recorded.
What Is a Deferred Revenue Account?
The Deferred Revenue account records the amount you’ve billed but not yet earned.
This typically applies when:
- Customers pay upfront for subscriptions.
- Services are delivered over a future period.
Until the service is delivered, the amount is treated as a liability, not income.
What Is a Recognized Revenue Account?
The Recognized Revenue account records the portion of revenue that has been earned for the current period.
As time passes and the service is delivered, Zoho Billing:
- Moves the applicable amount from Deferred Revenue.
- Records it under Recognized Revenue.
This ensures your financial statements reflect your actual earnings.
Let’s understand this with the help of a scenario.
Zylker, a software startup, enables Revenue Recognition in Zoho Billing. The company sells an annual software subscription for ₹12,000, billed upfront. On January 1, the customer pays the full ₹12,000. Since the service has not been provided yet, Zoho Billing does not treat this amount as income. Instead, the payment is recorded in the Deferred Revenue account. This represents a liability, indicating that Zylker has collected the payment but is yet to deliver the service.
Zylker provides access to its software evenly throughout the year. Using Zoho Billing, they can automatically recognize revenue based on the configuration set by Zylker.
Thus, ₹1,000 (₹12,000 ÷ 12 months) is automatically debited from Deferred Revenue and is credited to the Recognized Revenue account every month during the configured time period.
This ensures that Zylker’s reports reflect the revenue earned for that period, not just the amount collected.
At any point, you know:
- How much revenue is earned
- How much is still unearned
- What your true financial performance is
This builds trust, transparency, and compliance in your reporting.
Enable Revenue Recognition
To use Revenue Recognition for your organization, you have to enable it in Zoho Billing. Here’s how:
- Log in to your Zoho Billing organization.
- Go to Settings in the top right corner.
- Navigate to Module Settings and select Revenue Recognition under General.
- Click Enable Revenue Recognition.
Revenue recognition will be enabled for your organization. By default a revenue recognition rule will be applied. Additionally, you can create new revenue recognition rules and set preferences according to your business needs.
Configure Revenue Recognition Rules
Different businesses follow different practices for recognizing revenue based on when the service is delivered to their customers. For instance, businesses offering instant access to digital services may choose to recognize revenue at the start of the period, while those rendering it gradually; such as subscription-based SaaS platforms or telecom services, may prefer recognizing revenue evenly across the period. Zoho Billing supports these varied needs by allowing you to create customizable revenue recognition rules that align with your business model and reporting preferences.
The number of revenue recognition rules you can create depends on your Zoho Billing plan. Visit the pricing page to know more.
Here’s how you can configure a revenue recognition rule:
Log in to your Zoho Billing organization.
Go to Settings in the top right corner.
Navigate to Module Settings and select Revenue Recognition under General.
Click Edit in the right of Default Rule to configure the default rule or click + Create New Rule to create a new customized rule.
In the popup that appears, configure the following fields with the necessary information.
Rule Name: Enter a name for the rule you’d like to create. For example, End-of-Period Recognition for Consulting Service. You can check the Mark as Default checkbox to make this the default rule.
Description: Enter a short note that explains the purpose of this revenue recognition rule and how it should be applied.
Deferred Revenue Account: Select an account to track the payments received for services that are yet to be rendered.
Recognition Frequency: Select how often you want revenue to be recognized. The revenue can be recognized monthly, yearly, or just once.
Monthly - The revenue will be recognized every month. This option is preferred by quarterly, half yearly or annual subscriptions of recurring services which are usually billed together and the service is rendered monthly, such as streaming services, rent payments, or utility bills.
Yearly - The revenue will be recognized every year over the service period. This is useful for long-term service engagements. For example, a three-year IT support and consulting contract is recorded upfront, but the revenue is recognized each year as the service is delivered.
Once - The revenue will be recognized only once. This is useful for services where revenue needs to be recognized at a single point in time, such as a non-refundable onboarding or implementation service that is billed upfront and completed either at the start or end of the contract period. Since the service obligation is fulfilled at once, revenue is recognized in full without spreading it over the service duration.
Recognition Method: The Recognition Method determines what the recognized revenue will be based on and how it will be calculated.
- Daily - The revenue is recognized based on the actual number of service days. The total revenue is divided by the total number of days in the service period, and revenue is recognized for each day accordingly.
Scenario:A subscription worth $100 has been created from 13 February to 12 March.
The total number of days = 28.
Feb 13–28: 16 days
Mar 1–12: 12 days
Revenue per day = $100 ÷ 28 = $3.57
Recognized Revenue for February = $3.57 × 16 = $57.14
Recognized Revenue for March = $3.57 × 12 = $42.86
Evenly Distributed - The total revenue is divided equally across all recognition periods, regardless of the number of days in each period.
Scenario:A subscription worth $1200 is created from 1 January 2022 to 31 December 2022.
The revenue frequency is monthly.
Total number of periods = 12.
Recognized revenue per period = $1200 ÷ 12 = $100.
Evenly Distributed (With Prorated Values) - The total revenue is evenly distributed across all recognition periods. If the service period starts or ends mid-period, the first and last periods are prorated based on the number of service days in those periods.
Scenario:A subscription worth $1,200 is created for the service period 11 Jan 2024 to 10 Jan 2025, with the Recognition Frequency set to Monthly.
Although 13 calendar months are involved, the service period fulfills 12 months in total. The revenue is therefore evenly distributed across 12 periods, allocating $100 per fulfilled month, with proration applied to the partial months.
January 2024 (Jan 11–31)
Service days: 21 days
Total days in January: 31
Revenue recognized:
$100 × (21 ÷ 31) = $67.74
January 2025 (Jan 1–10)
Service days: 10 days
Total days in January: 31
Revenue recognized:
$100 × (10 ÷ 31) = $32.26
Total revenue recognized = $67.74 + ($100 × 11) + $32.26 = $1,200
Recognition Period: The Recognition Period refers to when the revenue is recognized within each recognition period.
- Period Start - The revenue is recognized at the beginning of each recognition period, based on the selected recognition method.
Scenario:Zylker has set the Recognition Period as Period Start.
Invoice Amount: $100
Start Date: January 15
End Date: February 14
Recognition Frequency: Monthly
Recognition Method: Evenly Distributed (with prorated values)
In this scenario, the revenue will be recognized as $54.84 in January and $45.16 in February.
Period End - When the Recognition Period is set to Period End, revenue is recognized only after the completion of each recognition period, based on the selected recognition method.
Scenario:Zylker has set the Recognition Period as Period End.
Invoice Amount: $100
Start Date: January 15
End Date: February 14
Recognition Frequency: Monthly
Recognition Method: Evenly Distributed
In this scenario, the revenue will be recognized as $54.84 in February and $45.16 in March.
Click Save.
Once you’ve configured a revenue recognition rule for your organization, you can associate it to items and subscription items.
Associate Revenue Recognition Rules With Products
You can associate Revenue Recognition rules to items and subscription items in order to automatically apply the rules to transactions created with the items or subscription items.
Here are two ways you can associate revenue recognition with the products you provide.
- Associate Revenue Recognition Rule for Items
- Associate Revenue Recognition Rule for Subscription Items
Associate Revenue Recognition Rule for Items
You can associate revenue recognition rules to items. Based on the revenue recognition rule associated, the sales transactions that you record with this item will be automatically applied.
Here’s how you can associate revenue recognition for items:
- Log in to your Zoho Billing organization.
- Navigate to Items under Product Catalog in the left side bar.
- Create or edit an item.
- Fill in the necessary details.
- Select a rule from the Recognition Rules dropdown. The Default rule will be applied to your items.
- Select an account from the Deferred Revenue Account dropdown to record advance payments and track them until the revenue is recognized.
- Click Save.
Associate Revenue Recognition Rule for Plans and Addons
You can associate revenue recognition rules to plans and addons. Based on the revenue recognition rule associated, the transactions created for those plans or addons will be automatically applied to the transaction.
- Log in to your Zoho Billing organization.
- Navigate to Plans (or) Addons under Product Catalog in the left side bar.
- Create or edit a plan or addon.
- Fill in the necessary details.
- Select a rule from the Recognition Rules dropdown. By default, the default rule will be applied to your plans and addons; you can select other rules using the dropdown.
- Select an account from the Deferred Revenue Account dropdown to record advance payments and track them until the revenue is recognized.
- Click Save.
Associate Revenue Recognition Rules from Transactions
You can associate revenue recognition rules with transactions such as invoices and subscriptions created in your organization. In scenarios where revenue needs to be recognized differently for the same item, you can apply revenue recognition rules at the transaction level instead of relying on a single rule.
This allows you to associate multiple revenue recognition rules for the same plan, addon, or item, depending on how it is used in a specific invoice or subscription, giving you greater control to align revenue recognition with your actual service delivery.
Associate Revenue Recognition Rules from Invoices
You can associate a revenue recognition rule with a line-item while creating or editing an invoice. When the rule conditions are met, Zoho Billing automatically recognizes the revenue for that line-item based on the selected rule and updates the corresponding revenue accounts.
To associate revenue recognition rules to invoices:
Log in to your Zoho Billing organization.
Navigate to the Invoices module under Sales in the left side bar.
Create or edit an invoice.
Click the More icon next to the item under the Items table.
Select Show Additional Information.
- Click Revenue Recognition in the item table.
- Select the desired rule from the Recognition Rules dropdown.
- Set the Start Date and End Date. The revenue will be recognized between the duration that you set.
- Select an account from the Deferred Revenue Account dropdown to record advance payments and track them until the revenue is recognized.
- Click Save. Your revenue recognition rule will be configured for the line-item.
Click Save to save your invoice.
Associate Revenue Recognition Rules from Subscriptions
You can apply a revenue recognition rule to a subscription when creating or editing it. Once the rule criteria are met, Zoho Billing recognizes the revenue as per the configured rule and updates the relevant revenue accounts.
To associate revenue recognition rules to subscriptions:
- Navigate to the Subscriptions module under Sales.
- Create or edit a subscription.
- Add the desired plans and addons.
- Click the More icon next to the plan or addon.
- Click Show Additional Information.
- Click Revenue Recognition below the item.
- Select the rule to be applied from the Recognition Rules dropdown.
- Select an account from the Deferred Revenue Account to record advance payments and track them until the revenue is recognized.
- Click Save.
- Click Save to save your subscription.
The revenue recognition rules will be updated for the plan and each of the addons you’ve configured in the subscription.
Subscriptions in Zoho Billing do not have fixed start or end dates. Instead, the start and end dates are applied at the invoice level based on the billing cycle. Each invoice generated from a subscription includes the start and end dates for the specific period it covers.
For example, if an invoice is generated for a yearly subscription covering January to December, the invoice start date will be January 1 and the end date will be December 31. You can edit this period at an invoice level.
Tracking your Revenue Recognition Details
Once the revenue recognition criteria are met, Zoho Billing automatically recognizes the revenue and records it in the appropriate accounts.
You can track these details through the following ways:
View Revenue Recognition Details
You can view the revenue recognition details from the transaction details page. Here’s how:
- Log in to your Zoho Billing organization.
- Navigate to the transactions list page. For example, the Sales module on the left side bar.
- Select the invoice whose revenue recognition details you’d like to view.
- Scroll down to the Revenue Recognition Details section.
You can view the overview of the revenue recognition details including the recognized amount, deferred amount, and the recognition preference.
Track Revenue Recognition Using Reports
Zoho Billing provides revenue recognition reports that give you clear visibility into recognized and deferred revenue for your transactions.
Here’s how you can view revenue recognition analytics:
- Log in to your Zoho Billing organization.
- Navigate to Reports on the left side bar.
- Click Revenue Recognition under Report Category.
This gives you a clear and reliable view of your revenue recognition related analytics at any point in time.
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