How do I record income from subscriptions or recurring payments?

Understanding Subscription and Recurring Payment Income

Subscriptions and recurring payments are a dependable source of revenue for many businesses, from gyms and streaming services to software companies, consultants, and membership-based communities. But that predictability can create confusion in accounting: when exactly should you record the income? Is it when the cash hits your bank account, when you send an invoice, or when you deliver the service over time?

The answer depends on a few key factors: the accounting method you use (cash or accrual), the terms of your subscription, whether you collect payment in advance, whether refunds are possible, and what you’re actually obligated to deliver each period. Getting this right helps you produce accurate financial statements, comply with tax rules, avoid misstating revenue, and make better decisions about pricing and growth.

This article walks you through how to record subscription income and recurring payments in a clear, practical way. You’ll learn the difference between cash received and revenue earned, how to handle monthly subscriptions versus annual prepayments, how to treat free trials and discounts, what to do with refunds and chargebacks, and how to keep your records clean when payments fail or customers churn.

Start With Your Accounting Method: Cash vs. Accrual

Before you decide how to record subscription income, you need to know which accounting method you’re using. In simple terms, the cash method records transactions when money changes hands. The accrual method records transactions when income is earned and expenses are incurred, regardless of when cash is received.

Cash Basis: Record Income When You Receive Payment

If you use cash-basis accounting, subscription income is generally recorded when the payment is received. This is common for very small businesses, freelancers, and sole proprietors, especially if they don’t carry inventory and don’t need complex financial reporting.

For example, if a customer pays £20 on January 5 for a monthly membership that covers January 5 to February 4, under cash basis you typically record the £20 as income on January 5. You don’t split it across months for accounting purposes, even though the service spans time.

Cash basis can be simpler, but it may not reflect the real performance of your subscription business. If you collect annual payments up front, cash basis can make revenue look “spiky” (high in one month, low in others), which can distort your understanding of steady recurring revenue.

Accrual Basis: Record Income When You Earn It

If you use accrual accounting, subscription income is recognized as you provide the service over time. This is generally considered the most accurate approach for subscription models because it matches revenue to the period in which you deliver value.

Under accrual accounting, a payment received in advance is not immediately income. Instead, it is recorded as a liability (often called deferred revenue or unearned revenue) until you deliver the subscription service. As each period passes and you provide access or benefits, you recognize a portion of that deferred revenue as earned revenue.

For example, if a customer pays £120 for a one-year subscription, accrual accounting typically recognizes £10 per month as revenue (assuming even delivery over the year), while the remaining balance stays in deferred revenue until it’s earned.

Define What You’re Selling: Access Over Time

Subscriptions usually represent an obligation to provide access or services over a defined period. That time element is the key to understanding revenue recognition.

Ask yourself: what does the customer receive, and when do they receive it? In many subscriptions, the customer receives continuous access to a product or platform. In memberships, they may receive ongoing benefits. In service retainers, they may receive availability or a bundle of hours over a month.

When a customer pays for a subscription, you are often being paid for future access. Under accrual accounting, you should treat that payment as unearned until you provide that access. Under cash accounting, you record it when you receive it, but it can still be useful to track earned versus unearned internally for management purposes.

Common Subscription Payment Structures

How you record subscription income depends on how payments are structured. Below are the most common structures and the typical accounting treatments.

Monthly Subscription Paid Monthly

This is the simplest arrangement. A customer pays each month for access during that month. If your billing is aligned with the service period (for example, you bill on the first of the month for that same month), the cash received and revenue earned may occur in the same month.

Under cash basis: record income when you receive the monthly payment.

Under accrual basis: record revenue during the month the service is delivered. If the customer pays at the start of the month for that month, you may recognize revenue evenly during the month. Many businesses recognize it monthly as a single entry at month-end, which is acceptable for practicality if it’s consistent.

Annual Subscription Paid Up Front

Annual prepayments are common because they improve cash flow and reduce churn. Accounting-wise, they require careful handling under accrual accounting.

Under cash basis: record the full annual payment as income when received.

Under accrual basis: record the payment as deferred revenue when received, then recognize revenue over the 12-month subscription term (usually straight-line, meaning evenly each month) unless there is a reason to allocate differently.

For instance, if you receive £240 on January 10 for a subscription from January 10 to January 9 the next year, you might recognize £20 per month, or prorate the first and last months depending on your policy. The important thing is to apply a consistent method and ensure it reflects how you deliver the service.

Multi-Year Contracts

Some subscriptions are sold as two-year or three-year plans, especially in business-to-business arrangements. The concept is the same: cash received may be large up front, but under accrual accounting you recognize revenue over the service period.

Also consider whether the contract includes multiple components, like setup services, training, premium support, or hardware. Those elements may need separate treatment, because they may be delivered at different times. If you bundle them into one price, you may need a reasonable method to allocate the total price across each component based on what you promised.

Recording Subscription Income Under Accrual Accounting: The Core Entries

To understand accrual accounting for subscriptions, it helps to look at the basic journal entries. Even if you use accounting software, the underlying logic matters.

1) When You Receive Payment in Advance

If the customer pays before the service period is completed, record the cash and the obligation.

Debit: Cash (or Bank)

Credit: Deferred Revenue (or Unearned Revenue)

This entry reflects that you have money, but you still owe the customer subscription access in the future.

2) As You Deliver the Subscription Over Time

At the end of each accounting period (often monthly), move a portion of deferred revenue into earned revenue.

Debit: Deferred Revenue

Credit: Subscription Revenue (or Revenue)

This entry recognizes that you have now earned that portion by providing access or services during the period.

3) If You Bill Customers After Providing Service

Some businesses provide access first and invoice later (for example, usage-based subscriptions billed in arrears). In that case, you may recognize revenue before you receive cash, which creates an accounts receivable balance.

Debit: Accounts Receivable

Credit: Subscription Revenue

Then, when the customer pays:

Debit: Cash

Credit: Accounts Receivable

This is typical for B2B subscriptions, especially where customers pay on terms (like net 30).

Proration: When Billing Cycles Don’t Match Calendar Months

Subscription periods don’t always align neatly with month-end. Customers may start on any day. If your accounting period ends on the last day of the month but the subscription runs from the 10th to the 9th, you need a consistent approach.

Many businesses handle this by recognizing revenue daily (prorated by day) and recording an adjusting entry at month-end. Others use a practical approximation, such as recognizing full monthly revenue in the month of billing. The more material the amounts, the more important accurate proration becomes.

A simple way to think about it: if you owe access for 30 days and you’ve provided 15 days by month-end, you’ve earned roughly half. Your deferred revenue should represent what you still owe after the reporting date.

Free Trials and Introductory Periods

Free trials can affect revenue in a few ways depending on how they’re set up.

True Free Trial With No Payment Collected

If the customer is not charged and no payment method is billed, there’s typically no revenue to record during the trial. You may track trial users operationally, but there is no accounting entry for revenue because no transaction occurred.

Trial With Payment Method Captured but Not Charged

Still typically no revenue until you charge. However, if you charge a nominal amount (like £1) to validate the card, that charge should be recorded as income or as a refundable deposit depending on the terms. Be careful: if it’s refundable or intended as a credit, it may not be revenue.

Discounted First Month or Introductory Pricing

If you charge a reduced price for the first period, you record revenue based on the actual price charged for that period. If you’re using accrual accounting and you’ve sold a multi-period commitment with variable pricing, you may need to consider whether the discount is effectively spread across the term. For many small businesses, recording each invoice at its billed amount is acceptable, but for more complex contracts, consistent allocation across periods may be needed to reflect the economics of the arrangement.

Refunds, Cancellations, and Chargebacks

Subscriptions often involve customer-initiated cancellations and occasional disputes. How you record them depends on the timing and whether revenue was previously recognized.

Refund Before Revenue Is Earned

If a customer pays in advance and then cancels early with a refund policy that returns unused time, you should reduce deferred revenue for the unused portion rather than reducing revenue (because it was never earned).

For example, a customer pays £120 up front and cancels after three months. Under accrual, you recognized £30 as revenue (3 months at £10) and have £90 remaining as deferred revenue. If you refund £90 for the unused portion:

Debit: Deferred Revenue £90

Credit: Cash £90

Revenue remains £30 because you did deliver three months of service.

Refund After Revenue Was Earned

If you refund a period that was already earned (for example, as a goodwill gesture), you may record a reduction of revenue or a contra-revenue account, depending on your reporting preferences.

Debit: Refunds (Contra Revenue) or Subscription Revenue

Credit: Cash

This makes it clear that you earned it originally but later reversed it due to a refund decision.

Chargebacks

Chargebacks occur when a customer disputes a transaction and the payment provider reverses it, often with additional fees. Accounting treatment can vary depending on your provider’s reporting, but generally you will reduce cash (or record a payable) and recognize the chargeback amount as a reduction of revenue if it relates to a subscription payment you previously recorded.

Also record chargeback fees as an expense (often payment processing fees or bank charges). Keep detailed notes because chargebacks are both an accounting item and an operational risk indicator.

Failed Payments, Dunning, and Revenue Recognition

A common subscription challenge is failed payments: cards expire, bank transfers don’t arrive, or invoices go unpaid. How you record income depends on whether you recognize revenue when billed or when collected.

Cash Basis and Failed Payments

Under cash basis, if the payment fails, you generally do not record income because no money was received. You might still track the failed payment in your billing system, but it doesn’t hit income until collected.

Accrual Basis and Failed Payments

Under accrual, if you invoice in advance and recognize revenue over the period, you may have accounts receivable outstanding. If a payment fails and you continue to provide access, you might still recognize revenue (because it is earned), but you must consider collectability. If it becomes unlikely you’ll collect, you may need to record bad debt expense or adjust revenue recognition policies to reflect the risk of nonpayment.

Many subscription businesses suspend access after a grace period. This operational policy can simplify accounting: if you stop providing service when payment is not collected, you stop earning revenue for that customer.

Setup Fees, Activation Fees, and One-Time Charges

Some subscription offerings include one-time fees: onboarding, implementation, activation, or setup. The right treatment depends on what the fee represents.

When a Setup Fee Is a Separate Service

If you truly deliver a distinct service (like a one-time onboarding session, custom configuration, or training) that is not simply part of providing ongoing access, you may recognize that fee as revenue when the setup service is completed.

When a Setup Fee Is Really Part of the Subscription

If the setup fee is simply a way to recover customer acquisition costs or is required to access the subscription but doesn’t transfer a distinct service beyond the ongoing subscription, many accounting approaches treat it as part of the overall subscription arrangement. Under accrual, it may be recognized over the subscription term rather than immediately, especially if the customer benefits from it over time.

The practical takeaway: document what the fee is for and be consistent. If you call it “setup” but it’s actually just a pricing lever, your financials can be misleading if you recognize it all up front.

Usage-Based Billing and Hybrid Subscription Models

Not all subscriptions are flat-fee. Many businesses charge a base subscription plus usage: per user, per transaction, per API call, per storage unit, or per hour.

For usage billed in arrears (after the month ends), you typically recognize revenue as the usage occurs and record an accrued receivable if you haven’t invoiced yet by period-end.

For usage billed in advance (less common), you may treat it like a prepaid amount and recognize revenue as the usage happens, adjusting for any true-ups.

Hybrid models can be tricky because you might have multiple performance obligations: a base access component and a variable usage component. Separating them in your accounting system can improve clarity and reduce errors.

Sales Tax, VAT, and Other Collected Taxes

When customers pay subscription fees, the total charged may include taxes like VAT or sales tax. These taxes are generally not revenue. Instead, you’re collecting them on behalf of the tax authority.

To record this properly, separate the net subscription price from the tax component. For example, if you charge £120 including VAT, only the net amount is revenue. The VAT portion is a liability until you remit it.

This separation is critical: if you record gross receipts as revenue, you’ll overstate income and potentially distort profitability.

Payment Processor Fees and Net Deposits

Subscription payments are often collected through payment processors that deduct fees before depositing funds. Your bank deposit may be less than the invoice amount. This can cause confusion if you book income based on bank deposits alone.

The clean approach is to record revenue at the gross amount charged to the customer, and record processing fees separately as an expense. Your cash balance reflects what you actually received, and the fee expense reflects the cost of collecting payments.

For example, if you charge £100 and the processor deposits £97 after a £3 fee:

Debit: Cash £97

Debit: Payment Processing Fees £3

Credit: Subscription Revenue £100

This approach makes your revenue comparable across channels and your fee rates measurable.

Revenue Schedules: The Backbone of Subscription Accounting

If you’re on accrual accounting, the most reliable way to handle subscriptions is to maintain a revenue schedule (sometimes called a deferred revenue schedule or revenue recognition schedule). This is essentially a plan that breaks each customer’s payment into the periods it covers, so you can recognize revenue consistently each month.

A revenue schedule can be maintained in accounting software, subscription billing software with accounting integrations, or a spreadsheet for smaller volumes. The key is that you know, for each period, how much revenue should be recognized and how much deferred revenue should remain.

A good schedule also helps you reconcile your deferred revenue balance. If your schedule says you should have £50,000 of deferred revenue at month-end but your general ledger shows £35,000, you know you have missing entries, incorrect mappings, or timing differences to investigate.

Reconciling Subscription Income: Avoiding Common Errors

Subscription accounting can go wrong in predictable ways. These are the most common mistakes and how to prevent them.

Recording Deposits as Revenue Under Accrual

A classic error is treating all cash receipts as revenue even when you’re on accrual accounting. If you do this, your revenue will be overstated during periods of strong prepayments and understated later. The fix is to route advance payments into deferred revenue, then release them to income over time.

Ignoring Partial Periods

If customers start mid-month, revenue should reflect the portion of service delivered within the reporting period. Many small businesses ignore this for simplicity, but as volumes grow, the cumulative misstatement can become significant. Choose a reasonable policy: daily proration is the most accurate, while monthly rounding may be acceptable if immaterial and consistent.

Mixing Gross and Net Recording

If some subscription income is recorded gross (full invoice amount) while other income is recorded net of fees (bank deposit amount), your revenue and expenses will be inconsistent. Always decide whether you record gross revenue and separate fees (common and clearer), or record net revenue (less informative). Most businesses prefer gross revenue.

Misclassifying Taxes as Revenue

VAT and sales tax collected from customers should generally be recorded as a liability, not income. Ensure your billing system and accounting software are configured to post tax amounts to the correct accounts.

Not Adjusting for Refunds and Chargebacks Correctly

Refunds and chargebacks should reverse the right part of the transaction. If a refund relates to unearned service, reduce deferred revenue. If it relates to service already delivered, reduce revenue or record contra revenue. Clear policies prevent messy cleanup later.

Subscription Metrics vs. Accounting Revenue

Many subscription businesses track metrics like Monthly Recurring Revenue (MRR), Annual Recurring Revenue (ARR), churn, and customer lifetime value. These are powerful operational indicators, but they are not always the same as accounting revenue.

MRR often standardizes subscription values into a monthly figure even if customers pay annually. Accounting revenue under accrual will also spread annual payments across months, which aligns well with MRR, but differences can still arise due to proration policies, refunds, credits, usage-based charges, and timing of service delivery.

It’s a good practice to reconcile your subscription metrics to your accounting revenue, at least at a high level. If they diverge significantly, that’s a signal to examine billing data, refunds, and the treatment of upgrades and downgrades.

Handling Upgrades, Downgrades, and Plan Changes

Customers often change plans mid-cycle. This introduces credits, proration, and potentially multiple overlapping service obligations.

If a customer upgrades mid-month and you charge the difference, your billing system may calculate a prorated upgrade charge. Under accrual accounting, you should recognize revenue in a way that reflects the service delivered: the old plan revenue for the time it was active and the new plan revenue for the time it was active.

Similarly, downgrades might create credits toward future invoices rather than refunds. Credits reduce future amounts billed, and under accrual accounting they effectively reduce future revenue recognition. Make sure credits are tracked in a way that you can reconcile them: either as a liability (customer credits owed) or as a contra-revenue mechanism depending on your system.

The practical approach is to rely on your subscription billing platform’s proration logic, but verify that the accounting integration posts changes correctly: revenue, deferred revenue, accounts receivable, and taxes should move in a coherent way.

What If You Provide “Credits” or “Tokens” Each Month?

Some subscriptions provide a monthly allowance of credits (for example, editing minutes, usage tokens, or included units). Accounting treatment depends on whether unused credits roll over and whether the customer is paying for access to the allowance or for actual usage.

If the subscription is primarily for access and the credits are simply a feature, many businesses recognize revenue evenly over time. If credits represent a material right to future goods or services and can be accumulated or redeemed later in a way that changes the timing of delivery, you may need to consider whether revenue recognition should follow usage patterns. For most small subscription businesses, straight-line recognition is acceptable if the customer receives ongoing access each period and credits are not a separate deliverable.

Practical Workflow: A Simple Monthly Close Process

Whether you manage subscriptions in a spreadsheet or an integrated system, a consistent month-end process helps you record income correctly and catch errors early.

First, reconcile cash receipts from your payment processor to your accounting records. Ensure all payouts are recorded and processing fees are captured.

Second, reconcile billed invoices (or subscription charges) to revenue recognized. If you use accrual accounting, confirm that deferred revenue increased for new prepayments and decreased appropriately for revenue recognized.

Third, review refunds and chargebacks for the month and ensure they were posted to the correct accounts (revenue, deferred revenue, fees).

Fourth, confirm taxes collected match your tax liability accounts and that you can tie them back to reports from your billing system.

Finally, spot-check a handful of customer accounts end-to-end: payment, invoice, revenue schedule, and deferred revenue balance. This is often the fastest way to catch configuration errors, especially after changing pricing or billing rules.

Choosing Accounts in Your Chart of Accounts

Even basic subscription accounting benefits from a clean chart of accounts. Here are common accounts that make reporting clearer:

Subscription Revenue (income)

Deferred Revenue / Unearned Revenue (liability)

Accounts Receivable (asset), if you invoice customers

Customer Credits (liability), if you issue credits that can be applied later

Refunds and Credits (contra revenue) or Refund Expense (depending on preference)

Payment Processing Fees (expense)

Sales Tax/VAT Payable (liability)

Separating these items prevents “miscellaneous” accounts from becoming dumping grounds and makes it easier to understand gross revenue, net revenue, and the cost of collection.

When Should You Get Professional Help?

If you have a small number of subscribers, simple monthly billing, and a straightforward refund policy, you can often manage recording subscription income with a well-structured process and consistent rules.

However, consider professional advice if you have multi-year contracts, bundled deliverables, significant usage-based billing, complex discounting, reseller arrangements, high refund volumes, or you’re preparing for external reporting, financing, or acquisition. Complexity increases the risk of misstating revenue, which can have serious consequences.

Even if you do most bookkeeping yourself, an accountant can help you set up the right accounts, confirm your revenue recognition approach, and ensure your tax treatment is correct. A one-time setup review can save a lot of time later.

Putting It All Together: A Clear Rule of Thumb

If you record on a cash basis, subscription income is generally recorded when you receive payment. It’s simple, but it may not reflect the real earning pattern of your subscription service, especially with annual plans.

If you record on an accrual basis, subscription income is recorded when it is earned over the subscription period. Payments received in advance go into deferred revenue and are recognized as income over time as you deliver access or services.

In both cases, it’s essential to separate taxes from revenue, record processor fees properly, handle refunds consistently, and reconcile your billing system to your accounting records regularly. With these foundations in place, your subscription income reporting will be accurate, understandable, and useful for decision-making.

A Final Checklist for Recording Subscription and Recurring Payment Income

Confirm whether you use cash or accrual accounting for your books and taxes.

Identify whether subscription payments are collected in advance or after service delivery.

For accrual accounting, use deferred revenue for advance payments and recognize revenue over time.

Set a consistent policy for proration when subscriptions begin mid-period.

Separate VAT/sales tax from revenue and record it as a liability.

Record payment processor fees as expenses, not as reductions of revenue, unless you intentionally use net reporting.

Establish clear treatment for refunds, chargebacks, and customer credits.

Reconcile billing, processor reports, and accounting records monthly.

As your subscription model grows more complex, consider implementing automated revenue schedules or an integration between your billing system and accounting software.