Accounting Concepts and Practices

Unbilled Receivables: How They Arise and Their Impact on Financial Statements

Understand how unbilled receivables develop, where they typically occur, and their subtle effects on financial reporting and accounting practices.

Companies often perform work or deliver goods before issuing an invoice. The value of this completed work is recorded as “unbilled receivables” on their balance sheets. This accounting entry reflects earned revenue that is not yet billable, impacting how businesses report their financial health and manage cash flow.

Understanding unbilled receivables helps clarify reported revenues and profits. It involves considerations of timing, risk, and specific accounting practices that shape a company’s financial picture.

How They Arise

Unbilled receivables emerge from the application of accrual accounting. Under this method, businesses recognize revenue when it is earned—that is, when goods or services are transferred to the customer—regardless of when payment is received. This contrasts with cash accounting, which records revenue only upon cash receipt. Accrual accounting aims to match revenues with the efforts made to generate them within a specific period.

The direct cause of unbilled receivables is a timing gap between earning revenue and issuing an invoice. This often happens because contractual conditions for billing haven’t been met, even though the company has fulfilled its performance obligations according to accounting standards. For example, a contract might permit invoicing only upon reaching certain milestones or project completion, despite ongoing work.

The Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, provides guidance.1Financial Accounting Standards Board. Revenue Recognition Summary A core principle is recognizing revenue when a company satisfies a performance obligation by transferring control of goods or services. If this occurs before the company has an unconditional right to payment (which usually aligns with invoicing), the earned revenue is recorded, creating an unbilled receivable. This ensures financial statements reflect the value provided, even before a bill is sent.

Where They Are Commonly Seen

Unbilled receivables frequently appear in sectors where the work or service delivery naturally creates a delay between earning revenue and invoicing. Service-based industries often face this, as revenue may be earned continuously, but billing occurs later based on project completion, milestones, or a set schedule.

Industries handling long-term, complex projects, such as construction, engineering, IT services, and consulting, are particularly likely to generate unbilled receivables. Contracts in these fields can span months or years, with revenue often recognized based on progress (e.g., percentage-of-completion). If a construction firm recognizes 40% of contract revenue upon reaching 40% completion, but the contract only allows invoicing at the 50% mark, the difference becomes unbilled receivables. Government contracting also commonly involves unbilled amounts due to specific billing clauses tied to progress verification or funding limits.

Subscription-based models, common in Software-as-a-Service (SaaS), also generate unbilled receivables. Companies might recognize subscription revenue evenly over the service period (e.g., monthly) but bill less frequently (e.g., annually or quarterly). If billing occurs after the service period or invoices are delayed, the revenue earned during that interval becomes unbilled receivables.

Impacts on Financial Documents

Unbilled receivables directly affect a company’s financial statements, beginning with the balance sheet. They are reported as an asset, signifying the company’s right to future payment for delivered goods or services. Under ASC 606, these might be classified as “contract assets” if the right to payment depends on factors other than time, like completing further obligations.2PwC Viewpoint. 33.3 Presenting Contract-Related Assets and Liabilities Once the right becomes unconditional (requiring only time to pass), the amount moves from contract asset to a standard account receivable. This distinction signals that while revenue is earned, invoicing awaits fulfillment of other conditions. These assets increase total assets but represent future, not current, cash inflows.

On the income statement, unbilled receivables are tied to revenue recognized under accrual accounting and ASC 606. When a performance obligation is met, the corresponding revenue is recorded, increasing reported revenue for the period, irrespective of invoicing status. This creation of an unbilled receivable (or contract asset) ensures the income statement reflects the economic value provided during that time, offering a view of profitability even before cash is received.

The statement of cash flows highlights the difference between net income (which includes unbilled revenue) and actual cash from operations. Recognizing unbilled revenue boosts net income without an immediate cash inflow. Therefore, an increase in unbilled receivables during a period typically appears as a non-cash adjustment, reducing operating cash flow relative to net income. Managing this gap between earned revenue and cash collection is important for maintaining liquidity.

Furthermore, unbilled receivables carry credit risk. Similar to standard accounts receivable, companies must assess contract assets for potential credit losses under ASC Topic 326, Financial Instruments—Credit Losses.3PwC Viewpoint. 9.7 Credit Losses and Credit Quality of Financial Instruments This involves estimating expected losses and establishing an allowance, affecting the asset’s value on the balance sheet and potentially expenses on the income statement. ASC 606 also requires detailed disclosures about contract assets in financial statement notes, explaining judgments, balance changes, and their relation to performance timing and payments, enhancing transparency for statement users.

Reconciling and Recording

Accurate management of unbilled receivables starts with correct initial recording. When revenue is earned under ASC 606 before an unconditional right to bill exists, a journal entry is made. This entry typically debits an asset account like “Unbilled Receivables” or “Contract Assets” and credits a revenue account, ensuring revenue recognition in the proper period.

The transition to billed status happens when conditions preventing invoicing are met (e.g., reaching a milestone). At this point, the company gains an unconditional right to payment. An accounting entry reclassifies the amount: Accounts Receivable is debited, and the Unbilled Receivable (or Contract Asset) account is credited. This moves the balance to standard receivables, indicating an invoice can be issued.

Maintaining accuracy requires regular reconciliation. This involves comparing the general ledger balance for unbilled receivables against supporting documents like contracts, progress reports, timesheets, or milestone certificates. Reconciliation verifies that recorded amounts are valid, accurately calculated, and reflect earned but unbilled revenue, identifying discrepancies needing investigation.

Strong internal controls are essential.4AICPA & CIMA. Revenue and Cash Receipts: Common Frauds and Internal Controls Key practices include:

  • Segregation of duties: Separating personnel who track progress from those handling accounting and billing.
  • Management review: Regular oversight and approval of unbilled receivable calculations and reconciliations.
  • System controls: Using software to track performance obligations and trigger alerts for billing milestones, reducing errors.

Thorough documentation retention policies also support the reliability of unbilled receivables figures.

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