What Is Accrued Revenue? Definition and Examples

Accrued revenue represents a fundamental concept in financial accounting, providing a more accurate picture of a company’s financial performance. It forms an integral part of the accrual basis of accounting, which aims to recognize financial transactions when they occur, rather than when cash changes hands. This approach ensures financial reports are not solely dependent on the timing of cash receipts, but rather on the actual earning process.

Understanding Accrued Revenue

Accrued revenue refers to income that a business has earned by providing goods or services but has not yet collected cash for. This concept is central to the accrual basis of accounting, which dictates that revenues should be recognized when they are earned, regardless of when payment is received. The primary goal of this accounting method is to align the recognition of revenues with the expenses incurred to generate them, a principle often referred to as the matching principle.

By applying this principle, financial statements offer a more complete and representative view of a company’s profitability and financial position for a given period. Recognizing accrued revenue ensures that a company’s financial statements reflect all economic activities, even those without immediate cash flow. Accrued revenue is classified as a current asset on the balance sheet, representing a claim the company has to future cash from its customers or clients. This asset signifies money owed to the business for work already completed or services already rendered, highlighting its right to collect payment in the future.

Practical Examples of Accrued Revenue

Many common business scenarios lead to accrued revenue, illustrating how companies earn income before receiving payment. For instance, a consulting firm might complete a project for a client by the end of the month, but its billing cycle dictates that invoices are sent out on the fifth day of the following month. The revenue is considered earned at month-end when the service is delivered, even though the cash payment will arrive later. This situation requires the firm to recognize the earned revenue in the period the work was performed.

Another common example involves interest earned on investments, such as bonds or savings accounts. While interest might be paid quarterly or annually, it accrues daily or monthly. A company holding such investments would recognize the interest earned up to the end of an accounting period, even if the actual cash payment of interest is not due until a later date.

Similarly, a landlord who rents out commercial property may have a tenant whose rent payment for July is due on August 5th. By July 31st, the landlord has earned the July rent, which is then recognized as accrued revenue. Sales commissions can also generate accrued revenue. A salesperson might earn a commission on a large sale completed in June, but the commission payment is contingent upon the customer making their full payment in July. The commission is earned when the sale is finalized in June, and the company records this as accrued revenue, reflecting the salesperson’s earned compensation before the cash is received from the customer. Each of these situations demonstrates revenue earned but not yet collected, necessitating its recognition in the period it was generated.

Accounting for Accrued Revenue

To properly account for accrued revenue, businesses make an adjusting entry at the end of an accounting period. This entry increases a revenue account on the income statement, such as “Service Revenue” or “Interest Revenue,” reflecting the income earned during the period. Simultaneously, it increases an asset account on the balance sheet, often labeled “Accrued Revenue” or “Accounts Receivable,” representing the amount owed to the company.

This accounting treatment has a direct impact on both the income statement and the balance sheet. On the income statement, the recognition of accrued revenue boosts the reported revenue for the period, leading to a more accurate depiction of the company’s profitability. Concurrently, on the balance sheet, the accrued revenue appears as a current asset, signifying a claim to future cash that the company expects to collect. This asset enhances the company’s overall asset base, providing a more complete view of its financial position.

When the cash payment for the previously accrued revenue is received in a subsequent accounting period, another accounting entry is made. This entry involves increasing the cash account on the balance sheet and decreasing the accrued revenue asset account. This process ensures that revenue is not recognized again when cash is received, as it was already properly recorded in the period it was earned.