Earned but Unbilled Fees: Accounting Treatment and Financial Reporting
Understand how earned but unbilled fees are recognized, recorded, and presented in financial statements to ensure accurate and compliant reporting.
Companies providing services often complete work before invoicing the client, generating revenue known as “earned but unbilled fees.” Properly accounting for these fees is necessary for accurately reporting a company’s income, assets, and overall financial health, information relied upon by investors, auditors, and management for performance assessment and decision-making.
What Qualifies as Earned but Unbilled Fees
Earned but unbilled fees, also called unbilled receivables or accrued revenue, represent income recognized by a company for completed work or delivered goods, even though an invoice has not yet been sent. This practice stems from the accrual basis of accounting, which requires recording revenue when it is earned and realizable, regardless of when cash is received or an invoice is issued. This distinguishes it from accounts receivable (where an invoice is sent but unpaid) and deferred revenue (where payment is received before work is done).
Guidance for recognizing revenue, including unbilled amounts, primarily comes from accounting standards like the Financial Accounting Standards Board’s (FASB) Topic 606, Revenue from Contracts with Customers. The core principle is to recognize revenue reflecting the transfer of goods or services to customers for the expected compensation. Revenue recognition occurs when a “performance obligation” is satisfied by transferring control of the promised good or service.
Control transfer is key, defined as the ability to direct the use of and gain most benefits from the asset. Revenue may be recognized over time if specific criteria are met, allowing for the recording of unbilled fees as work progresses. According to ASC 606, revenue is recognized over time if at least one condition applies:
- The customer receives and consumes benefits as the entity performs (e.g., ongoing cleaning services).
- The entity’s work creates or enhances an asset the customer controls during creation (e.g., construction on customer property).
- The work doesn’t create an asset the entity could use elsewhere, and the entity can enforce payment for work done so far (e.g., highly customized manufacturing).
If none of these apply, revenue is recognized at a specific point in time, usually upon delivery or formal acceptance. Therefore, earned but unbilled fees are typically recognized when services are rendered continuously or goods transferred incrementally over time under contract terms, meeting an “over time” criterion before a billing milestone. The recognized amount must reflect expected compensation, and collection must be probable.
Typical Entries in Accounting Records
When revenue is earned before invoicing, an adjusting journal entry is made at the end of the accounting period. This entry involves debiting an asset account—often called “Unbilled Receivables,” “Accrued Revenue,” or “Contract Asset”—and crediting a revenue account. For example, completing $10,000 of services in December to be billed in January would result in a $10,000 debit to Unbilled Receivables and a $10,000 credit to Service Revenue in December.
This entry ensures revenue is recorded in the period earned, reflecting the company’s performance and establishing the unbilled amount as an asset on the balance sheet. This asset usually appears as a current asset if collection is expected within a year or the normal operating cycle.
When the invoice is eventually issued, another entry transfers the amount from unbilled status to a standard receivable. This involves debiting “Accounts Receivable” and crediting “Unbilled Receivables” (or the equivalent account). Using the previous example, sending the $10,000 invoice in January requires a debit to Accounts Receivable and a credit to Unbilled Receivables for $10,000. This moves the amount to regular tracking for invoiced sums awaiting payment without affecting revenue already recognized.
The cycle concludes when the customer pays. At that point, the company debits Cash and credits Accounts Receivable.
Common Scenarios Where They Arise
Earned but unbilled fees frequently occur in industries where service delivery or project work spans extended periods, often preceding contractually set billing dates. Long-term construction projects, for instance, often recognize revenue based on progress (like percentage-of-completion) before reaching billing milestones specified in the contract.
Professional service firms, such as consultants, lawyers, and accountants, also commonly generate unbilled fees. They may provide services continuously but bill clients periodically (monthly, quarterly) or upon project completion. If an accounting period ends before the billing cycle, the value of services already rendered constitutes earned but unbilled revenue. Project-based work in fields like software development often ties billing to specific deliverables, meaning work done towards a milestone before it’s formally invoiced qualifies as unbilled revenue.
Subscription models, especially in Software-as-a-Service (SaaS), can also lead to unbilled amounts. While customers might pay upfront or periodically, the service is delivered continuously, and revenue is recognized over the subscription term. If revenue recognition (e.g., monthly) is more frequent than billing (e.g., quarterly), unbilled fees can accumulate. Mid-cycle upgrades or usage-based charges earned before the next invoice date also contribute.
Complex contracts with multiple distinct performance obligations can generate unbilled fees. Revenue is allocated to each obligation and recognized as it’s satisfied. If one part is completed (like equipment delivery) but invoicing depends on fulfilling another part later (like installation), the revenue for the completed portion may be recognized but remain unbilled until the invoicing condition is met. Administrative delays in generating invoices for completed work can also temporarily create unbilled revenue.
Where They Appear on Financial Statements
Earned but unbilled fees are reported as assets on the balance sheet (statement of financial position), representing the company’s right to future payment for work already performed.
The specific balance sheet line item may vary. While terms like “Unbilled Receivables” are used, accounting standards often classify these amounts as “Contract Assets.” A contract asset signifies a right to payment conditional on something other than time passing (e.g., completing another task). In contrast, a receivable represents an unconditional right to payment, requiring only the passage of time. Many earned but unbilled amounts initially qualify as contract assets. Once the right becomes unconditional, often upon invoicing, the amount is reclassified to a receivable. Accounting standards require receivables and contract assets to be presented or disclosed separately. Companies might use alternative descriptions if the distinction is clear.
These assets are typically classified as current assets, assuming the company expects to bill and collect within its operating cycle or one year. If collection is expected later, the amount would be classified as non-current. Specific industry practices, like in construction with longer operating cycles, might lead to different classifications, which should be disclosed.
Further details are provided in the notes to the financial statements. Required disclosures help users understand the nature, amount, timing, and uncertainty of revenue and cash flows.1AICPA & CIMA. FASB ASC 606: Illustrative Annual Disclosures These notes often include balances of contract assets and receivables, explanations for significant changes, and information about judgments made in applying revenue standards, offering context for assessing the quality of these assets.