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?

Accrued revenue is income that a company has earned by providing goods or services but has not yet received payment for by the end of an accounting period. This revenue is recorded in the company’s financial statements to reflect the income earned during the period, even though the cash has not yet been received.

Accrued revenue is recognised as an asset on the balance sheet and as revenue on the income statement, ensuring that the company’s financial performance is accurately represented according to the accrual basis of accounting.

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.

Scenarios where accrued revenue occurs

• Long-term projects: When a company performs work or provides services over a period of time and bills the client at the end or upon reaching milestones.
• Subscription services: When a company provides subscription-based services that are billed periodically, but revenue is earned as the service is delivered.
• Interest income: When interest is earned on investments but not yet received.
• Sales on credit: When goods or services are sold on credit and payment is to be received at a later date.

How is accrued revenue recorded?

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. When one company records accrued revenues, the corresponding company records it as an accrued expense, a liability on their balance sheet.

Initially, the accrued revenue is recognised on the income statement with a credit to revenue. Simultaneously, an associated accrued revenue account on the balance sheet is debited in the form of accounts receivable. When the customer pays for the goods or services received, the accountant debits the cash account on the balance sheet and credits the same amount to the accrued revenue or accounts receivable account.

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.