There is a significant paradigm shift today, from using perpetual licensed model of software, towards using a hosted software, or software-as-a-service (SaaS). A lot has been written about the benefits of the SaaS model.

In software, broadly licenses are recognised on delivery. They are categorised into term-based vs capacity-based or perpetual license. For term-based license, the revenue is accounted over the term of the license. As for the capacity-based or perpetual license, the revenue is recognized upfront, when the license in delivered.

Additionally, the line items in the traditional license model is different as opposed to hosted services. Typically, the line items for revenue recognition in include licence fee which is broken down further to initial license fee or a capacity license fee, implementation and customization fee, Annual maintenance support fee. In a subscription model, all these are bundled into a subscription fee. You may also have a setup fee over the subscription fee.

The revenue recognition for each of these components differ. For instance, the revenue for license fees can be immediately recognized, whereas, the implementation and customization fee or the AMC fee will be recognized over a period of time.

With the shift in traditional software licensing business models to SaaS model by business owners, the success of the business does not depend anymore on how many softwares are sold, but instead, on how many customers are willing to use your product on a recurring basis.

The way we evaluate financial aspects such as capital, profitability etc. changes in SaaS merely because of the nature of service being delivered on a recurring basis.

Additionally, the customer ROI becomes a key differentiating factor over the product ROI, where the value of the customer is realized over the duration of the relationship.

With the shift to hosted software (single tenant or multi-tenant), the key accounting issue remains in understanding what should be accounted for - the sale of a software or of a service.

If you view it as a software, you recognize revenue as soon as the software is delivered. But in case of the service, you keep recognizing revenue over the duration of customer’s relationship with the service provider.

The answer to SaaS Accounting is provided by Accounting software such as Quickbooks, Xero, Sage, NetSuite or SAP which are quite exhaustive in functionality to manage all accounts receivables, payables, taxation and many reports around finances.

There are accounting software that are trying to solve the problem of automated bookkeeping. There are also fintech companies like this, that sell Slack bots for accounting management.

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