If you are a SaaS business owner, you must read this article to know:
- What are the Various Chart of Accounts of a SaaS Business?
- What are the Components of the Chart of Accounts?
SaaS chart of accounts is critical for every SaaS business. This is because it determines how you categorize and organize your financial information under various heads. The purpose of the SaaS chart of accounts is to record all the financial transactions like expenses, revenue, assets, liabilities, etc in the cleanest and most organized way possible.
Accordingly, the SaaS chart of accounts is the foundation of key financial statements and reports of your SaaS business. How detailed and well-organized your chart of accounts determines the kind of reports you can generate. That is whether it is possible to generate reports on particular revenue and expense accounts and their subaccounts. Or whether you can only get reports that capture financial information associated with the parent revenue and expense accounts.
If you are looking to approach VCs to raise funds for your SaaS business, make sure you have hygienic accrual-based accounting financial statements in place. Likewise, having an organized chart of accounts is really helpful at the time of tax filing.
To help you understand better, we will take Quickbooks as the online accounting software as an example to illustrate various charts of accounts you must create for your SaaS business.
What is a SaaS Chart of Accounts?
SaaS chart of accounts (COA) is the list or the index of all the accounts that determines how the complete financial information of your SaaS business is organized. These accounts capture all your financial transactions into debit and credit accounts that have taken place during the operation life of your SaaS business. Accordingly, it contains all the financial details you need to create financial statements. And it is from the chart of accounts that the financial statements like income statements and balance sheets are prepared.
Simply put, SaaS charts of accounts is the list of ledger accounts that are the backbone of your company’s financial accounting. These capture every possible financial transaction that takes place during the life of your SaaS business and are used to prepare financial statements like income statements, balance sheets, other critical reports. Thus, COA is a tool that helps investors and other stakeholders give a clear view of the financial wellbeing of your company. The accounts captured in the COA break down every transaction from sales, expenses, to the purchase of assets.
Additionally, these accounts tell you how much you own and owe to outsiders.
Sample Chart of Accounts and Sub-Accounts – Quickbooks
If you take Quickbooks online accounting software as an example, the accounts under COA are organized under various columns. These include the name, account type, and detail type of the account. These are, in fact, the three important components of the SaaS chart of accounts, no matter what SaaS accounting software you use. Here’s a snapshot of the chart of accounts prepared in Quickbooks.
The names of your General Ledger accounts portray the financial transactions that the account captures or puts together. Make sure that you name the accounts that instantly tell your accounting team what the account is all about. It should be intuitive and the one that fits well with your SaaS business.
As you can see in the snapshot above, the names of various accounts are captured under the ‘Name’ column. Some of these include cash and cash equivalents, accounts receivable, allowance for bad debts, etc. These names are easy to understand and reveal the type of financial transactions it groups together.
2. Account Type
Account type determines the order of accounts that you see in the chart of accounts. This also determines the financial statement in which a specific account would be reflected. The chart of accounts clubs together with the general ledger accounts into broader categories called the account types.
As mentioned earlier, account types reflect the important components of the income statement and balance sheet.
Although, you may go for much more account types. However, there are typically five major account types used to categorize or group various financial transactions.
Assets are resources that your SaaS business holds and that give you economic benefits in the near future. Thus, they have the potential to generate cash or cash equivalents either directly or indirectly.
Additionally, these appear on your company balance sheet and are further divided into current assets and fixed assets.
Where current assets are the ones that get converted into cash within the operating cycle of your business or one year, which is longer. Fixed assets, on the other hand, are the ones that are long-term assets and cannot be easily converted into cash in the normal course of business. Also, fixed assets are further divided into tangible and intangible assets.
Current assets include cash, inventories, accounts receivables, prepaid expenses, and marketable securities. Whereas, fixed assets include tangible assets like property, plant, and equipment, long-term investments, and intangible assets like patents, copyright, and goodwill.
Liabilities are your current obligations or the money that you owe to creditors, lenders like banks, and equity owners. These appear on your balance sheet and are further categorized into current and non-current liabilities.
Current liabilities are the obligations that your SaaS business is expected to meet within the normal operating cycle or one year, whichever is longer. Accordingly, these may include accounts or bills payable, deferred revenues, and accrued expenses.
Non-current liabilities, on the other hand, are the obligations that remain outstanding for more than a year. These include deferred tax liabilities, long-term debt, long-term provision, etc.
Equity, or owner’s equity, appears as the third head in the balance sheet. This represents the money invested by the investors in your SaaS business.
The owner’s equity is further categorized into retained earnings and paid-in capital.
SaaS revenue is the revenue you earn from the subscription fee that you receive for your SaaS products or cloud-based services. This is the revenue that accrues and is recognized over a period of time in your books of accounts.
This may also include revenue from professional service contracts and multiple performance obligations.
Recurring Revenue is the amount of subscription fee received from customers who buy your cloud-based services in a given period. This may include SaaS upgrades, maintenance, and support offered by you as a SaaS provider. Such revenue can be collected:
- Monthly – Monthly Recurring Revenue (MRR)
- Annually – Annual Recurring Revenue (ARR)), and
Similarly, you as a SaaS provider may go for upfront billing but do not recognize this revenue. This unrecognized revenue is nothing but deferred revenue.
Deferred revenue is linked to services that you have booked and billed for but not yet provided to the customers. That is, you have received payment from your customers for the SaaS offerings you are yet to provide to your customers.
Since you are yet to provide the products or services, you cannot record the payment received as revenue in your financial statements. This is unearned revenue and this is recorded as a liability in your balance sheet.
Thus, you debit cash received for the SaaS offerings you are yet to provide and credit deferred revenue with the payment received from your customer. Next, at the end of each of the months, you debit the deferred revenue account and credit the revenue account with a portion of the payment. This continues until there is nil or zero balance in the deferred revenue account.
Expenses refer to the cost you incur to get subscriptions, provide support, and run the day-to-day operations of your SaaS business.
Cost of Goods Sold
Accordingly, there are expenses that are directly associated with providing SaaS offerings. These include:
- Cost of Acquisition – the money you spend to acquire new
- Cost to Serve – the amount you spend on providing the necessary support to customers for SaaS offerings.
Likewise, there are expenses that are incurred to run the day-to-day operations of your SaaS business. However, these are not directly associated with rendering SaaS offerings.
These expenses include:
- Research and Development
- Sales and Marketing Cost
- General and Administrative Expenses
Quickbooks automatically categorizes your transactions under various account heads as soon as you sync your bank account or upload transactions. However, you can customize these accounts and add new accounts as per your need.
Similarly, Quickbooks numbers these accounts by default which too can be customized. Also, you can create subaccounts so that you can further divide the broader accounts like revenue and expenses into more detail.
For instance, as mentioned above, the parent account of revenue can be divided into subaccounts like recurring revenue and deferred revenue. Likewise, the parent account of expenses can be further divided into subaccounts like COGS, sales and marketing, general and administrative expenses, etc.
3. Account Numbers
Apart from the account name and type, you also find eah of the general ledger accounts being numbered. This is done so that you can include the financial transactions under the correct account.
Typically, the general ledger account numbers contain 4-7 digits. The more the number of digits, the better it is. This is because it is easy to include more subaccounts under a given parent account over time.
4. Detail Type
Another critical part of getting detailed reports from your chart of accounts is clearly defining the ‘Detail Type’. There are times when you want to create new account types that fit in with your SaaS business. However, you are not sure of what name to give to a new account that you want to create to capture more details so that you can get valuable information about the financial health of your business.
In such cases, detail type comes to your rescue. It gives you more insights bout the type of new account that you want to create. This makes it really easy for you to name the new accounts you want to create.
The detail type is very different from the account type. Account types are actually the elements that impact your books of accounts. This is because these define how financial transactions would be recorded in your books of accounts.
Whereas, detail type only captures the information that helps you to name a new account type in an appropriate manner.
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