What is SaaS Accounting? Understanding the Essentials

The Philippines is now emerging as a hotbed for tech and Software as a Service (SaaS) companies. The annual revenue growth rate for this sector far exceeds the national average. By 2029, the SaaS market volume in the Philippines is expected to reach US$898.91 million.

SaaS companies are revolutionizing how businesses operate in a way that customers love, with flexible, subscription-based software solutions. Solutions that grow with their customers. It’s the ideal setup.

But there’s a problem. This new approach makes accounting for SaaS particularly tricky. Unlike traditional product sales, SaaS companies must account for:

• Monthly billing cycles
• Revenue recognition rules
• Churn rates
• Deferred revenue
• Customer lifetime value

And each of those brings its own complex challenges. 

So if you’re an SaaS accountant struggling to keep up in a fast-moving environment, this is for you. We’re going to give you the lowdown on types of SaaS accounting and SaaS accounting essentials so you can stay compliant and help your business scale for sustained results.

How is SaaS accounting different from traditional accounting?

Traditional accounting involves recording and reporting on a business’ finances.

The principles of accounting are more or less the same universally. An SaaS accountant’s job is to deal with an SaaS business’ books, the same as any other accountant in any other industry. But the methods and operations shift significantly. 

So, how is SaaS accounting different? Firstly, SaaS businesses operate on a subscription-based model rather than one-time product sales. This changes everything. It introduces dynamic financial processes like:

• Revenue recognition: In traditional accounting, revenue is typically recognized at the point of sale, when the product or service is delivered. In contrast, SaaS companies must recognize revenue over the life of the subscription, even if payment is collected upfront. Let’s say a customer pays ₱60,000 for an annual plan, only ₱5,000 is recognized each month. This approach means that income is matched to the period when the service is actually provided.
• Cash flow model: Modeling cash flow is also a particular challenge in SaaS. If a client pays for an annual service upfront but the SaaS company only recognizes the revenue monthly, you’ll find a natural disconnect between cash inflow and reported income. Essentially, this creates deferred revenue. Managing that requires careful tracking and reporting.
• Metrics: In traditional accounting, accountants might take a broader view of metrics. But in SaaS, a huge variety of metrics must be considered. They include:
• Customer churn
• Monthly recurring revenue (MRR)
• Customer acquisition cost (CAC)
• Agility: SaaS companies often scale rapidly and attract investors. This means their accounting must be both agile and audit-ready at all times. Precision is the name of the game, so SaaS accountants need to make sure their forecasting and revenue tracking is top-notch.

Key SaaS accounting metrics every business should track

Today, accountants in every industry need to stay on top of a number of metrics and measurements. 

After all, in SaaS, recurring revenue and customer retention are top priorities, so tracking specific metrics is crucial.

If you’re an SaaS accountant, here are some metrics you should be keeping an eye on:

1. Monthly recurring revenue (MRR): MRR is the lifeblood of an SaaS business. It’s how companies measure the predictable revenue generated from active subscriptions each and every month. But don’t forget, MRR also helps you to quickly identify trends and take action to improve retention or expand customer value. And, of course, to forecast growth.
2. Customer acquisition cost (CAC): Or, how much it costs to acquire one new customer (including sales, marketing, and onboarding). Put simply, if your CAC is too high and your revenue too low, there’s a problem. Tracking CAC is essential for optimizing marketing spend.
3. Customer lifetime value (CLTV or LTV): Another fundamental metric. CLTV estimates the total revenue a customer is expected to generate over the course of their relationship with your business. It takes into account both customer retention and revenue per account. The CLTV to CAC ratio is super important. Healthy businesses generally aim for a 3:1 ratio or higher.
4. Churn rate: The percentage of customers who cancel their subscriptions over a given period. And don’t be fooled, even a tiny increase in churn can have big revenue consequences. Monitoring churn is essential, at least if you want to identify retention issues and improve customer satisfaction.

In short, these metrics aren’t just abstract numbers. They’re real factors with real consequences. Every SaaS accountant must measure these metrics and others to ensure their business is on the right path.

Accounting tools, like QuickBooks, make tracking metrics significantly easier. Simplify metric tracking and focus on scaling your SaaS company with confidence.

Monthly recurring revenue (MRR) and annual recurring revenue (ARR)

Before we move on, let’s take a closer look at some of those key metrics. First up: MRR and ARR metrics are pivotal in all types of SaaS accounting. They’re all about recurring revenue, which is revenue that repeats either monthly (MRR) or annually (ARR).

Knowing these figures helps SaaS companies:

• Monitor growth
• Assess performance
• Make informed strategic decisions

Let’s start with MRR. This represents the total predictable revenue generated from active subscriptions in a given month. Don’t forget, it includes all recurring charges, but not one-time fees.

The formula for calculating MRRis actually very straightforward:

MRR = Average Revenue Per Account (ARPA) × Total Number of Active Customers

Let’s say you have 200 customers paying ₱3,000 per month. 3,000 x 200 = 600,000. Your MRR would be ₱600,000.

ARR is the annualized version of MRR. It tells the business how much it is making year-on-year through recurring subscriptions. 

So:

ARR = MRR × 12

Following the same example, your ARR would be ₱7,200,000. 

MRR is handy for short-term financing, while ARR is particularly useful for high-level financial planning, especially when it comes to giving investors and stakeholders a confident, long-term view. 

Together, they give a strong overview of growth and make forecasting for the future much, much easier.

Customer acquisition cost (CAC) and customer lifetime value (CLTV)

It doesn’t end with MRR and ARR. They tell you how much the business is making, but not necessarily where,why, or, how you might improve the efficiency and profitability of your sales and marketing strategies.

If you want to gain this fundamental insight into how to make more ARR, you’re going to need to measure Customer Acquisition Cost (CAC) and Customer Lifetime Value (CLTV). 

Let’s take these one at a time. Firstly, CAC is the average amount a company spends to acquire a new customer. This includes marketing expenses, sales team salaries, advertising, and onboarding costs. 

Here’s the formula:

CAC = Total Sales and Marketing Expenses ÷ Number of New Customers Acquired

For example, if you spend ₱1,000,000 on sales and marketing in a month and acquire 100 new customers, your CAC is ₱10,000. 

CLTV is very different. It’s an estimation metric. It calculates how much total revenue a business expects to earn from a single customer over the entire duration of their subscription. Here’s what that looks like:

CLTV = Average Monthly Revenue per Customer × Customer Lifetime (in months)

So, if a customer pays ₱5,000/month, for 24 months. Their CLTV is ₱120,000.

Earlier, we mentioned the CLTV to CAC ratio. This is a real ratio that businesses in many sectors use to determine just how well or poorly their sales and marketing strategies are working. 3:1 is the common benchmark, meaning a customer should bring in three times what it costs to acquire them.

And of course, you can use CLTV and CAC to inform everything from pricing to marketing strategies. Keeping a close eye on these metrics helps you allocate your resources where they can pack the biggest punch.

Understanding SaaS revenue recognition

Revenue recognition can be a tricky concept, especially in an SaaS context, and calculating it can be one of the biggest SaaS accounting challenges. 

The first thing you have to recognize is the difference between receiving payment and earning revenue. Essentially, we recognize revenue when the product/service is provided, not just when the payment is made. This is what we call accrual accounting. This is actually stipulated by ASC 606, a global accounting standard, so companies everywhere follow this norm.

However, companies everywhere don’t necessarily have a hard time calculating revenue recognition. For example, a physical store selling products can recognize revenue almost instantly. There’s essentially no gap in time between transferring control of the product and receiving payment.

Accounting for SaaS is different. For example, a customer might pay ₱120,000 upfront for a one-year subscription. However, the business can only recognize ₱10,000 each month. The rest is considered deferred revenue,.

ASC 606 provides a handy five-step process for recognizing revenue:

1. Identify the contract with the customer
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the price to the performance obligations
5. Recognize revenue when (or as) each obligation is satisfied

Hopefully, that’s clarified what revenue recognition really means. Unfortunately, it’s an unavoidable reality of SaaS that recognizing revenue can be complex. There’s often a time delay between receiving payment and fulfilling the service, which means accountants must take extra care with reporting and forecasting.

Deferred revenue and accrued revenue

In SaaS accounting, deferred revenue and accrued revenue are critical concepts for aligning income with the actual delivery of services. They’re hugely important for reflecting what a company has earned, not just what it’s billed for.

Let’s start with deferred revenue. This is income received in advance for services that have not yet been fully delivered. In SaaS, we see this all the time. A SaaS business might charge a customer ₱60,000 upfront for a 6-month subscription. But the service hasn’t been delivered, so it’s initially recorded as a liability, not revenue.

Each month, as the service is provided, ₱10,000 is recognized as earned revenue and deducted from the deferred revenue balance.

So, how does this differ from accrued revenue? Accrued revenue is basically the opposite of deferred revenue. For example, if a company provides one month of service in April but doesn’t bill the customer until May, that unbilled April revenue is recorded as accrued revenue. Earned, but not collected.

Both revenue categories are essential:

• Deferred revenue prevents overstating earnings to date
• Accrued revenue makes sure earned income isn’t left off the balance sheet

Now, this can quickly become complex, especially when managing multiple subscription tiers and billing cycles. But it doesn’t have to be. These days, automated accounting software, like QuickBooks, can do a lot of the heavy lifting on your behalf, leaving you free to focus on insights and strategy.

Common SaaS accounting challenges and how to overcome them

It’s clear that accounting for SaaS is no walk in the park. There are multiple systems and processes that need to be adhered to in order to successfully manage SaaS business finances. Not least, diverse billing structures and compliance.

But while there are challenges, there are also solutions. Accountants use a variety of tried-and-tested strategies to overcome common hurdles, including:

• Managing complex billing cycles: Go onto any SaaS pricing list and you’ll notice it probably offers multiple tiers, maybe even monthly, quarterly, annual, or even usage-based pricing. Throw in accounting for mid-cycle signups or cancellations, it can get complicated. The best way around this is to use accounting software with SaaS-specific features that automate billing, apply proration rules, and clearly distinguish between earned and deferred revenue. 
• Handling upgrades and downgrades: Customers frequently change their subscription levels. Obviously, you hope they upgrade, but they might downgrade, too. Either way, accounting for these changes impacts both revenue recognition and MRR. The solution? Implement a system that automatically adjusts revenue schedules when changes occur. That way, you won’t have to go through everything manually.
• Revenue recognition and compliance: SaaS revenue recognition can be a tricky thing to get your head around, and mistakes can lead to misstatements and even regulatory issues. The solution is to build a structured revenue recognition process based on the five-step ASC 606 model, and use tools like QuickBooks to automate this process.
• Consolidating financial data: SaaS is platform-heavy. You’ll have various systems handling sales, customer management, and billing. As you can imagine, this can cause headaches when you need to consolidate info. The best solution is to use platforms with high integration capacity. This will mean finding systems that support your CRM and your accounting software to create a central finance hub.

Managing complex billing cycles and subscription changes

Many industries don’t realize how easy they have it when it comes to billing. Unfortunately, for an SaaS business, it’s not so simple.

There’s a whole web of variables involved in SaaS billing, and they constantly shift. There are trial periods, discounts, mid-cycle subscription changes, and more, all to take into account. 

Let’s explore some of the complexities of billing cycles and subscription changes:

• Trial periods: Trials are great for nabbing new customers, however, they also make billing trickier. They delay revenue generation while services are already being consumed. This creates a gap between customer acquisition and income recognition.
• Discounts: While promotions and discounts may draw customers in, the problem is that they affect the overall value of the subscription, which must be accurately reflected in both invoicing and revenue recognition.
• Upgrades, downgrades, cancellations: More intricate still, customers often change their subscriptions. Just imagine a user switches from a ₱2,000/month plan to a ₱3,500/month plan halfway through the billing period. That change affects everything. You must now account for these charges and adjust both deferred revenue and MRR accordingly. If you don’t, there could be a compliance issue.

Luckily, you don’t have to give up on SaaS accounting altogether, these complexities are manageable. Here are a few tips:

• Automate billing and revenue recognition using accounting platforms, like QuickBooks.
• Track changes in real time to reflect billing adjustments instantly and maintain audit-ready records.
• Standardize billing policies for trials, discounts, and any upgrades and downgrades to avoid confusion.

Don’t forget, handling these issues doesn’t just make your life easier, it also reduces the risk of harmful billing disputes which could impact your business.

Ensuring compliance with accounting standards

Digitalization is making a lot of things easier, but one thing it’s making harder is compliance. That’s because new regulations must be brought in as the face of business evolves to keep everything above board. 

However, it does mean that SaaS companies in the Philippines have to ensure compliance with both global accounting standards and local regulations. ASC 606, the international standard for revenue recognition, plays a central role in this.

ASC 606 requires all companies to recognize revenue only as performance obligations are fulfilled. Not recorded all at once when payment is received. 

So what happens if you don’t comply with ASC 606 regulations? You’ll end up with misstated revenue and potential legal ramifications, not to mention, a serious loss of investor trust.

Here are some expert tips to help you stay compliant:

• Understand the five-step ASC 606 framework and apply it consistently.
• Automate revenue recognition using accounting tools like QuickBooks.
• Maintain detailed contract documentation to support how revenue recognition decisions are made.
• Work with an accountant familiar with SaaS and international standards.

Lastly, never make compliance an afterthought. Embed it into your financial operations from day one, and you’ll be in a much better position to avoid risks.

Leveraging technology for efficient SaaS accounting

It should be clear from all the challenges that manual accounting just won’t cut it anymore in 2025. Luckily, there’s a solution. Cloud-based accounting software is a real game-changer. It offers everything from automation to real-time financial visibility, everything you need to take the headache out of modern SaaS accounting.

Here are just some of the ways your business can harness accounting software, like QuickBooks, to make your accounting more efficient and future-ready:

• Automated revenue recognition: SaaS-friendly tools can automate revenue recognition, meaning they can manage deferred and accrued revenue and adjust for subscription changes.
• Track KPIs: KPIs like MRR, ARR, CAC, CLTV, and churn, can be a real pain for SaaS companies, but accounting software offers financial dashboards and customizable reports to quickly spot trends and make better, data-backed decisions.
• Multi-currency transactions: If you’re a Philippines-based SaaS company with international clients, accounting tools can integrate multiple aspects of your business, like CRM or payment gateways, to ensure data flows seamlessly across departments and across borders.

If that wasn’t enough, cloud-based accounting software is available from anywhere. That’s a massive advantage for those managing distributed teams or scaling internationally.

Spend the time to seek out the right accounting tools for you and your company, it will be worth it.

Benefits of cloud-based accounting software

Going cloud-based is the way forward in 2025. Over half of all enterprises in the EU now use cloud-based software for accounting and finances, with that number rising. The Philippines isn’t far behind. Simply put, the advantages cloud-based tech brings are undeniable. 

Here are a few of the major benefits:

• Automation: Automation has been the word of the year in business for the last three years running. From invoicing and billing to revenue recognition and expense tracking, cloud-based solutions reduce the need for manual entry and calculations. That saves time, and also reduces the risk of human error.
• Scalability: Cloud-based tools are also highly scalable, making them ideal for fast-growing SaaS startups. However many customers you’re currently serving, you can very easily adjust your systems without overhauling your accounting system.
• Integration capabilities: Accounting platforms, like QuickBooks, have wide integration capabilities. That means you can connect seamlessly with CRMs, payment gateways, subscription management tools, and project management systems. This enables you to create an ecosystem where data flows freely.
• Real-time data access: With cloud-based accounting software, you can simply connect to your system and benefit from real-time data wherever and whenever you need it.

One of the leading cloud-based accounting platforms for SaaS companies in the Philippines is QuickBooks, offering everything from automated invoicing to in-depth reporting.

Try QuickBooks for free today.