Back in the 1400s, Luca Pacioli, a monk who was intrigued by numbers, stumbled upon a bookkeeping style in Venice which he found so fascinating that he dedicated an entire section of his math encyclopedia to this style.
This is likely the first time the double-entry accounting system was categorized. The encyclopedia was a huge success, and Luca Pacioli is considered as 'The Father of Accounting and Bookkeeping'. During his time Pacioli collaborated with other historical figures, such as Leonardo di Vinci, who was often described as Pacioli's protege.
With the double-entry accounting system, "You could itemize the profits in each account, so you knew which products you were doing well in and which you weren't,” explained author Jane Gleeson-White in her book Double entry: How the Merchants of Venice Created Modern Finance.
“Then you could start to think about how you would change your business activities. It was just a whole revolution in the way of thinking about business and trade."
In the e-commerce and subscription business world, this accounting method is critical for tracking MRR, or monthly recurring revenue.
Recurring billing platforms with double-entry accounting principles
From an accounting perspective, the double-entry system also helps troubleshoot and zero in on any data entry errors. If left unchecked, these errors would be hard for a system to reconcile financial transactions.
As important as this component is for recurring billing, this critical facet is often left out of recurring billing platforms. Essentially, developers who are building platforms from scratch generally understand very basic accounting principles. It’s easier to only rely on basic accounting to build a billing system but it leads to much bigger problems.
As Serge Frigon, Fusebill’s Product Architect says, “This has been a lesson that was developed in accounting that has taken centuries to then perfect. It’s crazy to think that you can build up a software platform, and that you’re going to come up with a better accounting system than the one that has taken over 1,000 years to perfect.”
Reasons a recurring billing system should be built with strong accounting support
When selecting a subscription billing system, there are several different reasons a business should look for one that uses this double-entry accounting platform.
1. Recurring billing should distinguish sales from collections
Recurring billing is very different from a one-time sale in a traditional brick and mortar store. When you're selling that way, the sale is an instantaneous transaction between the customer and the business.
Conversely, a subscription-based business and the subsequent recurring billing is centered around customer lifecycles. For example, if your business has a monthly subscription fee of $10, the communication begins with something like, “You owe me $10 and I’m going to collect that $10 from your credit card.” Then, the next month, you need to issue another $10 sale and you will try to collect those funds.
The collection process isn’t always perfect. The credit card on file may have expired or there isn’t enough money on the bank account to pay the $10 fee.
A recurring billing platform with dunning management can initiate credit card retries, while also automatically sending messages to the customer to alert him of the payment challenge.
The double entry accounting system supports the efficient categorization of account receivables and is used by the dunning management system to keep track of due payments.
2. Recurring billing has to distinguish deferred from recognized revenue
Because recurring billing is frequently associated with services provided over time, it is critical that your recurring billing application properly keeps track of revenue recognition in line with service delivery.
This provides powerful insights when dealing with migrations and cancellations during the customer lifecycle.
For example, Netflix bills a customer at the beginning of the month. However, they can’t recognize that revenue immediately. They have to defer a portion of it over the course of the subscription period. This keeps a business in compliance with ASC 606.
By deferring that revenue, the business essentially has a liability, in that they owe a service for the entire subscription period, whether it’s a month or a year.
When a business effectively separates deferred revenue and earned/recognized revenue, they can handle those situations when a customer cancels early or needs to migrate to a different plan. A business needs to know where they are in the billing period—whether it’s day 5, day 13, or day 30—so they can accurately handle returning the right amount of money.
Moreover, it is critical to provide accurate financial statements by tracking deferred versus accrued discounts. This is important because the accountants need to be able to provide accurate financial statements at the end of the month, quarter, or year. If they have not built this up proper ledger structure, they can't properly output the financial records easily.
3. Your recurring billing platform has to handle different transactions
When working in a recurring billing platform, you need to be able to leverage and track a number of different types of transactions, including credits (reversal of sales), refunds (reversals of payments), and write offs.
These are common GAAP (Generally Accepted Accounting Principals) that are a standard part of a dual-entry accounting system. Accountants never want to use an eraser and eradicate a historical financial transaction. Instead, the paper trail is everything.
From an accounting standpoint, it’s better to have 100 edits to a posted invoice that was generated five years ago than to have that invoice deleted. If an invoice is deleted, accountants cannot justify the amounts that are remaining.
You must make sure that your recurring billing platform is properly engineered to leverage proper dual-entry accounting techniques that will efficiently audit the log activities that occur during your customers’ lifecycles.
4. Your software should facilitate easy calendar comparisons
Additionally, a recurring billing system with a strong double-entry accounting component makes it much easier for businesses to compare numbers on a month-to-month or year-to-year basis. This helps quantify any changes within your business structure by easily demonstrating stronger or weaker times.
A comprehensive recurring billing platform will give a user the ability to run a number of different reports to help identify a variety of financial data, from sales by year, sales by customer and sales by activation cohort.
5. Your recurring billing platform can speed up month-end activity
Recurring billing systems that do not have a strong double-entry accounting component can make closing out a month very challenging. This is because manual adjustments would have to be made to reconcile the numbers.
For example, Uberflip reported that prior to using the Fusebill platform, they tracked accounts on spreadsheets. The subsequent monthly invoicing took up to five days to complete. Fusebill helped streamline their subscription billing processes, which reduced their invoicing activity to one day each month.
6. Your recurring billing software should easily integrate with accounting platforms
Subscription-based businesses are looking for a platform that will facilitate the day-to-day processing of their recurring billing. However, they also want to output the sales activities to whatever accounting programs they use to manage their entire company.
If a recurring billing platform doesn’t fully integrate with GLs (general ledgers) and other standard accounting principles, it is difficult to push that sales activity to an accounting platform.
Companies that do not use a double-entry accounting system will find it very difficult to integrate with accounting platforms.
Shareholders, investors and financiers place a high priority on financial reports that are prepared with standard accounting techniques. If you have a new SaaS company and you are interested in getting financing and talking to shareholders, proper accounting will give weight to your metrics.
Double-entry accounting systems are a crucial business necessity. In fact, when Fusebill was created, it was built on the double-entry accounting system. Right at the outset, we decided we would handle taking care of this hard process for recurring billing for a large-scale enterprise. It only made sense, because from our days at Protus, we saw the challenges of not having a product write back to the GL double-entry accounting platform.
What that means fundamentally is that every transaction that is processed within the Fusebill system has a corresponding debit and credit transaction, which is the sole definition of a double-entry accounting system.
In other words, when you apply a charge to somebody, there is a debit to accounts receivable and a credit to the deferred revenue for that same charge.
Making advancements in technology do not necessarily incorporate the newest, shiniest, fastest products. Instead, improving technology and procedures often means looking to the past to see what works and didn’t work.
As Luca Pacioli taught us in the 15th century, sometimes discoveries are so timeless that they complement current technologies seamlessly.