Revenue Recognition is the process of converting cash from ‘bookings’ into ‘revenue’.
Let’s say a customer has signed an annual contract of $12000 at $1000 per month. Can the $12000 be recognized as revenue immediately? Not really. From a SaaS accounting perspective, the revenue can be recognized only when the said product/service is delivered to the customer. So in this example, $1000 revenue can be recognized every month in return for the product/service delivered, until the end of the contract.
Simply put, revenue recognition is about when a business earns its revenue.
Revenue recognition is important for SaaS businesses because the business model demands to charge customers upfront for services that will be delivered over a period of time. So, SaaS businesses have to track the money that flows in their account, and how much of it is actually recognized.