What Is Accrued Revenue? With Examples
Understand how businesses account for revenue earned but not yet collected. Learn its importance for accurate financial reporting with clear examples.
Accrued revenue represents income a business has earned by providing goods or services, but for which it has not yet received payment or issued an invoice. This concept is a fundamental aspect of accrual basis accounting, which aims to reflect a company’s financial performance accurately. By recognizing revenue when it is earned, regardless of when cash is exchanged, businesses gain a clearer picture of their economic activities during a specific period. Accrued revenue ensures that financial statements align with the actual delivery of value to customers.
Understanding the Concept of Accrued Revenue
Accrued revenue is a direct application of the accrual accounting method and the revenue recognition principle. Under accrual accounting, revenues are recognized when they are earned, meaning when goods are delivered or services are performed, not necessarily when cash changes hands. This differs from cash basis accounting, which records revenue only upon cash receipt.
The core characteristic of accrued revenue is that goods or services have been successfully delivered or performed, and payment is expected in the future. This ensures financial statements reflect the economic reality of transactions. Accrued revenue differs from unearned revenue, where cash is received before delivery, creating a liability. It also differs from accounts receivable, which typically arises after an invoice is issued; accrued revenue precedes the invoicing stage. Once an invoice is sent, accrued revenue often transforms into accounts receivable.
Common Examples of Accrued Revenue
Accrued revenue manifests in various business scenarios where the earning event precedes the cash receipt or invoicing. These examples illustrate how revenue is recognized as services are rendered or goods are provided.
One common instance involves services rendered but not yet billed. For example, a consulting firm might complete a significant portion of a project by month-end. Even if the invoice is sent the following month, the revenue for the completed work is considered earned and accrued in the current month.
Another example is interest earned on loans or investments. Interest accrues daily or monthly over the loan period, even if the actual payment is received quarterly or annually. Similarly, a landlord earns rent throughout a month; the portion corresponding to days passed within the current accounting period is considered accrued revenue.
Accounting for Accrued Revenue
Accrued revenue impacts a company’s financial statements by ensuring accurate reporting of earned income. On the Income Statement, it is recognized as revenue for the period in which it was earned, providing a true picture of the company’s performance. On the Balance Sheet, accrued revenue is recorded as a current asset, representing a claim to receive cash in the future. This asset is often categorized as “Accrued Revenue” or, if invoicing is imminent, may be included within “Accounts Receivable.”
The basic journal entry to record accrued revenue involves debiting an asset account, such as “Accrued Revenue” or “Accounts Receivable,” and crediting a revenue account. For instance, if a company earns $10,000 in services by month-end but hasn’t billed yet, it debits Accrued Revenue for $10,000 and credits Service Revenue for $10,000. This entry aligns revenue recognition with the period in which the services were performed.
When cash is received, a subsequent entry debits the Cash account and credits the Accrued Revenue or Accounts Receivable account. This removes the asset from the balance sheet as the claim to cash has been satisfied, converting it into actual cash.