How to Record Accrued Revenue Journal Entries

Accrual accounting is a fundamental method used in financial reporting. This approach aims to provide a more accurate depiction of a company’s financial health by recognizing economic events when they occur, rather than when cash changes hands. Accrued revenue, a core concept within accrual accounting, represents income that a business has earned through delivering goods or services, or from the passage of time, but for which payment has not yet been received. Recording accrued revenue is important for ensuring financial statements accurately reflect a company’s performance and financial position.

Understanding Accrued Revenue

Accrued revenue signifies income earned by providing goods or services, or from the passage of time, even though cash payment has not yet been collected. It is also sometimes referred to as unbilled revenue or accrued income. This concept differs significantly from cash basis accounting, where revenue is recognized only when cash is actually received. Accrual accounting ensures that financial statements reflect the economic reality of transactions, regardless of the timing of cash flow.

Accrued revenue is classified as a current asset on the balance sheet because it represents a claim to receive cash in the future, typically within one year. As revenue is earned, it is recorded on the income statement, providing a clearer picture of a company’s performance during a specific accounting period. Common examples include interest earned on a loan that has not yet been paid, or services completed for a client but not yet invoiced.

Determining When to Accrue Revenue

Accruing revenue is governed by the revenue recognition principle, a cornerstone of accrual accounting. This principle dictates that revenue should be recognized when it is earned. The earning process is considered substantially complete when a company has fulfilled its obligations under an agreement, entitling it to payment. This means goods or services have been transferred to the customer, and the company expects to receive the agreed-upon consideration.

Generally Accepted Accounting Principles (GAAP), specifically Accounting Standards Codification (ASC) 606, provide a five-step model for revenue recognition. These steps involve:
Identifying the contract with a customer.
Pinpointing the performance obligations within that contract.
Determining the transaction price.
Allocating that price to the performance obligations.
Recognizing revenue as each performance obligation is satisfied.
For revenue to be recognized, there must be reasonable assurance that payment will be collected.

Making the Initial Accrued Revenue Entry

Recording the initial accrued revenue entry is an adjusting entry made at the end of an accounting period. This entry ensures that revenue earned during the period is recognized. The journal entry involves debiting an asset account, such as “Accrued Revenue” or “Accounts Receivable,” and crediting the appropriate revenue account. Debiting the asset account increases the company’s claim to future cash, while crediting the revenue account increases the reported income for the period.

For instance, consider a consulting firm that completes a $5,000 project for a client on December 28, but will not invoice the client until January 5 of the next year. To properly record the revenue in December, the firm would make the following adjusting entry on December 31:

Date: December 31
Debit: Accrued Revenue $5,000
Credit: Consulting Revenue $5,000
To record revenue earned for services completed but not yet billed.

Another example involves accrued interest revenue. If a company lends $10,000 at an annual interest rate of 6% and earns interest monthly, by December 31, one month’s interest of $50 ($10,000 0.06 / 12) might have been earned but not yet received. The adjusting entry on December 31 would be:

Date: December 31
Debit: Accrued Interest Receivable $50
Credit: Interest Income $50
To record interest earned but not yet received.

Similarly, if a business rents out a portion of its property for $1,000 per month, and the tenant pays on the 5th of the following month, on December 31, the company would accrue $1,000 in rent revenue. The entry would be:

Date: December 31
Debit: Accrued Rent Receivable $1,000
Credit: Rent Revenue $1,000
To record rent earned but not yet received.

Handling Subsequent Entries for Accrued Revenue

After the initial accrued revenue entry is made, subsequent entries are required when cash is eventually received or at the beginning of the next accounting period. When the customer pays the outstanding amount, a cash receipt entry is recorded. This transaction involves debiting the “Cash” account and crediting the asset account, such as “Accrued Revenue” or “Accounts Receivable.” For example, if the consulting firm from the previous section receives the $5,000 payment on January 5, the entry would be:

Date: January 5
Debit: Cash $5,000
Credit: Accrued Revenue $5,000
To record cash received for previously accrued revenue.

Alternatively, some businesses utilize reversing entries at the start of a new accounting period to simplify subsequent routine transactions. A reversing entry is an optional journal entry that undoes a prior adjusting entry. For accrued revenue, a reversing entry made on the first day of the new period would debit the revenue account and credit the accrued revenue or accounts receivable account. This creates a temporary negative balance in the revenue account, which is then offset when the regular cash receipt entry is made.

Following the consulting firm example, if a reversing entry is used on January 1, it would be:

Date: January 1
Debit: Consulting Revenue $5,000
Credit: Accrued Revenue $5,000
To reverse the accrued revenue entry from the previous period.

Then, when the cash payment of $5,000 is received on January 5, the standard entry for cash receipt would be:

Date: January 5
Debit: Cash $5,000
Credit: Consulting Revenue $5,000
To record cash received for services rendered.

This method simplifies daily bookkeeping as the bookkeeper can make a normal cash receipt entry. Reversing entries are often used for accrued revenues and expenses because they streamline the accounting process and can reduce the chance of errors.