Accrued Revenue

Accrued revenues are the revenue that the company has earned in the normal course of business after selling the goods or after providing services to a third party, though the payment has not been received.

Though the money is yet to be received for the goods and services provided, the businesses know that they would receive it at a later date as their service is already delivered. Hence, the cash inflow here is almost guaranteed, This makes the accrued revenue be considered an asset on the balance sheet of the company.

Accrued revenue is a part of the sale recognized by the seller but not yet billed to the customer. This concept is mostly used in businesses where revenue recognition is delayed for an unreasonable longer period.

It is common in industries where billings to customers are delayed for several months until a designated milestone is reached (in terms of percentage completion) or until the end of the project. However, it is much less commonly used in manufacturing businesses, where invoices are usually issued as soon as products are shipped.

Let us consider the accrued revenue examples with a detailed case study below.

Example 1

XYZ International is having a consulting project with one of its large clients, under which the agreement delineates two milestones for billing, after each of which the client owes $60,000 to XYZ as the agreement is such that it only allows for billing at the end of the project for $120,000. Therefore, XYZ must create below is the accrued revenue journal entry to record reaching the first milestone:

At the end of another two months, XYZ completes the second milestone and bills the client for $120,000. XYZ records the following is the journal entry to reverse the initial accrual and, after that, records the second entry for the $120,000 invoice:

Debit balances related to accrued billings are recorded on the balance sheet, while the consulting revenue change account appears in the income statement.

The reverse of deferred revenue, i.e., accrued service revenue, can also arise when customers pay in advance but the seller has not provided services or shipped goods. In that case, the seller initially records a liability for the received payment and later realizes the sales related to the same when the transaction is completed.

Example 2

To check how the accrued revenue journal entry is made, let us have a look at the example below:

Redfin Corporation reported such accrued revenue of $12.09 million in the March'18 quarter and $13.3 million in the December'17 quarter.

Accrued revenue is shown as an asset on the balance sheet, but it’s not always as valuable an asset as liquid cash. It takes effort related to billing and collection from the customer to convert it into cash. Having large amounts of accrued revenue can adversely impact the working capital cycle. It can be a sign that a company isn’t efficient in getting its customers to pay for its services.

This concept is required to match revenues with expenses properly. The absence of accrued revenue may present excessively low initial revenue and low-profit levels for a business, which does not indicate the true picture of the entity. Also, not using such accrued revenue may result in lumpier revenue and profit recognition as revenues are only recorded when invoices are issued, typically after longer intervals.

The difference between accrued and deferred or unearned revenues are listed below:

This article has been a guide to Accrued Revenue & its meaning. Here we explain vs deferred revenue & how to record it along with examples to show its journal entry. You may have a look at these recommended articles below to learn more about accounting –

• Deferred Revenue Journal Entry
• Deferred Revenue Examples
• What is Unearned Revenue?
• Deferred Revenue