Accrual accounting

1. Service provided, not yet paid:
   • On December 15th, XYZ Marketing Services provides advertising services to a client, ABC Retailers, but does not receive payment immediately. The total invoice for the services is £5,000.

   The accounting entry for this transaction is:

   $\text{Accounts receivable}(Asset)=\; \pounds 5,000$

   $\text{Service revenue}(Revenue)=\; \pounds 5,000$

   This entry reflects an increase in the accounts receivable asset, representing the amount owed by the client, and an increase in service revenue. The revenue is recognized when the service is provided, regardless of when the payment is received.

2. Payment received in the next accounting period:
   • On January 10th of the following year, ABC Retailers makes a payment of £5,000 to XYZ Marketing Services for the services provided in December.

   The accounting entry for the payment is:

   $\text{Cash}(Asset)=\; \pounds 5,000$

   $\text{Accounts Receivable}(Asset)=\; \pounds 0$

   This entry reduces the accounts receivable asset and increases the cash asset to reflect the payment received.

Accrual accounting recognises revenue when it is earned (when services are provided or goods are delivered) and expenses when they are incurred, regardless of the timing of cash transactions. In this example, revenue is recognised in the period when the advertising services are provided, even though the payment is received in a another period.