What Is Accrued Revenue? Definition and Examples

Accrued revenue represents income a business has earned but has not yet received payment for. This concept recognizes that revenue is generated when goods or services are delivered, regardless of when the corresponding cash is collected. It reflects a claim a company has on a customer or client for value already provided. This accounting treatment ensures that a company’s financial statements accurately reflect its economic activities during a specific period. It is a fundamental element in understanding a company’s true financial performance before cash transactions occur.

The Accounting Principle Behind Accrued Revenue

The concept of accrued revenue is rooted in the accrual basis of accounting, which is the standard method used by most businesses in the United States, in accordance with Generally Accepted Accounting Principles (GAAP). Accrual accounting dictates that revenues are recognized when they are earned, and expenses are recognized when they are incurred, irrespective of the timing of cash inflows or outflows.

This method contrasts with the cash basis of accounting, which only records transactions when cash is exchanged. For instance, if a consulting firm completes a project for a client in December but will not bill them until January, the revenue is still considered earned in December under the accrual method. Similarly, interest income on a savings account is earned daily, even though it may only be credited to the account at the end of the month or quarter.

The matching principle, a core tenet of accrual accounting, requires that expenses be recognized in the same period as the revenues they helped generate. Accrued revenue ensures that the income derived from providing goods or services is recorded in the correct period, allowing for an accurate matching of associated costs, which helps stakeholders assess true profitability.

Recording Accrued Revenue Entries

Recording accrued revenue involves a specific journal entry that reflects the earning of income before the receipt of cash. When revenue is earned but not yet invoiced or paid, a company debits an asset account, such as “Accrued Revenue” or “Accounts Receivable,” and credits a revenue account, such as “Service Revenue” or “Sales Revenue.” This initial entry increases both the company’s assets and its reported revenue for the period. The debit signifies the company’s right to receive cash in the future, while the credit recognizes the income generated from its operations.

Consider a software company that completes a significant development phase for a client on December 20, 2024, but per their contract, the invoice will only be sent and payable on January 15, 2025. To accurately reflect the revenue earned in 2024, the company would make an adjusting entry on December 31, 2024. This entry would involve debiting an account like “Accrued Revenue” for the agreed-upon amount and crediting “Software Development Revenue” for the same amount. This ensures the 2024 financial statements include the revenue earned, even though cash has not yet been collected.

Once the cash payment is received from the client, a subsequent journal entry is required to reflect this transaction. At that point, the company would debit the “Cash” account, increasing its cash balance. Concurrently, the “Accrued Revenue” or “Accounts Receivable” account would be credited to reduce that asset, as the claim for future payment has now been settled. Until the cash is collected, the accrued revenue balance remains on the balance sheet as a current asset, indicating an amount owed to the company.

Accrued Revenue Compared to Related Concepts

Accrued revenue, while often discussed in conjunction with other financial terms, holds distinct characteristics that differentiate it from related concepts. One common point of confusion is the distinction between accrued revenue and accounts receivable. While closely related and sometimes used interchangeably, accrued revenue refers to income that has been earned but not yet formally billed or invoiced to the customer. Accounts receivable, on the other hand, represents amounts that have already been billed to customers and are awaiting collection. Both are classified as current assets on the balance sheet, as they represent future economic benefits expected to be received within one year.

Another important contrast is found when comparing accrued revenue with unearned revenue, also known as deferred revenue. Accrued revenue signifies revenue earned but not yet received in cash, representing an an asset for the company. Conversely, unearned revenue occurs when a company receives cash from a customer before it has earned the revenue by providing the goods or services. In this scenario, the company incurs an obligation to deliver goods or services in the future, making unearned revenue a liability on the balance sheet. These two concepts are essentially opposite sides of the timing of cash and revenue recognition.

Finally, accrued revenue is a concept exclusively found within the accrual basis of accounting. This method recognizes revenue when it is earned, regardless of when cash changes hands. In contrast, cash basis accounting only recognizes revenue when cash is actually received and expenses when cash is paid out. Therefore, under a cash basis system, there is no need for accrued revenue, as income is simply recorded when the cash arrives. This fundamental difference highlights how accrued revenue is a direct consequence of adhering to accrual accounting principles to provide a more accurate financial picture.