Accrued revenue

Definition

Accrued revenue refers to revenue that a company has earned but has not yet received in cash. It represents revenue that has been recognised on the books, but for which payment has not yet been received. This is an important concept in accrual accounting, where revenue is recognised when it is earned, not necessarily when it is received in cash.

What is accrued revenue?

A company records accrued revenue through an adjusting journal entry. It involves debiting (increasing) an accrued revenue asset account and crediting (increasing) a revenue account.

Accrued revenue is important for accurate financial reporting. It ensures that financial statements reflect all revenue earned in a given period, even if cash hasn’t been received yet.

Accrued revenue is crucial for accurately representing a company’s financial performance. It helps ensure that financial statements reflect the revenue the company has earned, even if the payment hasn’t been collected yet.

Example of accrued revenue

1. Consulting services provided, not yet billed:
   • On December 15th, XYZ Consulting provides consulting services to a client, ABC Corporation. The services are completed, but the invoice for the services, totalling ₦8,000, will be sent to the client in the next billing cycle.

   The accounting entry for the accrued revenue is:

   $\text{Accounts receivable}(Asset)=\; ₦8,000$

   $\text{Consulting revenue}(Revenue)=\; ₦8,000$

   This entry recognises the revenue for the consulting services even though the invoice has not been sent to the client.

2. Billing the client:
   • In January, XYZ Consulting sends the invoice to ABC Corporation for the consulting services provided in December.

   The accounting entry for billing the client is:

   $\text{Accounts receivable}(Asset)=-₦8,000$

   $\text{Consulting revenue}(Revenue)=\; ₦8,000$

   This entry reflects the reduction of the accounts receivable asset and the formal recognition of the revenue, as the services have now been billed to the client.