What is a subscription?
Published
A subscription is a contract where the customer pays a recurring amount (monthly or annually) for a continuing service. Its accounting essence: payment precedes delivery - which demands a specific treatment on both sides.
The same contract from both sides
An annual subscription of SAR 6,000 (net) paid upfront on 1 January:
For the provider (seller): the collection is not yet revenue - the service hasn't been delivered.
On collection: Bank 6,900 / Deferred revenue 6,000 + Output VAT 900Each month-end: Deferred revenue 500 / Revenue 500
A seller booking the 6,000 as January revenue inflates one month, zeroes eleven - and breaches the accrual basis.
For the subscriber (buyer): the payment is not yet an expense - the benefit isn't consumed.
On payment: Prepaid expense 6,000 + Input VAT 900 / Bank 6,900Each month-end: Subscription expense 500 / Prepaid expense 500
Frequently asked questions
Does a monthly subscription need the same spreading?
Practically no - a monthly payment is consumed in its month, so it books straight to expense or revenue. Spreading applies to payments covering more than one period.
When is VAT due on an annual subscription?
It follows the law's supply-date, invoicing, and payment rules - and on an upfront payment it is due with the invoice/payment in practice, not spread across the months. Edge cases go to your accountant.
A customer cancels an annual plan mid-term?
The unconsumed portion is refunded per the contract through a credit note that adjusts deferred revenue and VAT; what was consumed stays as earned revenue.