Softrax

Accrued Revenue

What is Accrued Revenue?

Accrued revenue, also known as accrued income or accrued receivables, is an accounting practice to recognize revenue that has been earned but not yet received in cash or recorded in the company’s books. Accrued revenue typically occurs when a company has provided goods or services to a customer, but the customer has not yet paid for them.

To take into account both the outstanding payment and the delivery of the good or service, accrued revenue is typically recorded as a liability on the company’s balance sheet and as revenue on the income statement. This recording helps to ensure that a company’s financial statements accurately reflect its financial position and performance, even if the cash payment has not been received.

There are certain industries in which accrued revenue is common, including consulting, subscription-based businesses, or construction companies that are dealing with long-term projects. For these industries, accrued revenue accounting accurately reflects a company’s financial performance by matching revenue earned with the associated expenses, even if the cash hasn’t been received yet. 

What are the Principles of Accrued Revenue?

The principles of accrued revenue are:

Revenue recognition: When a company delivers goods or services to a customer and has earned the right to receive payment, it recognizes the revenue for that transaction. This recognition is based on the revenue recognition principles outlined in accounting standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Also, revenue recognition is determined by the five steps of ASC 606 and IFRS 15, which provide a standard means to recognize revenue that is industry-neutral and dependent on the contract.

Creation of a Liability: Simultaneously with recognizing the revenue, the company records an accrued revenue liability on its balance sheet. This liability represents the amount of revenue that has been earned but not yet received.

Adjustment and Recognition of Cash: When the customer pays for the goods or services, the company records the cash receipt. At this point, the accrued revenue liability is reduced, and the cash account is increased by the same amount.

What are Examples of Accrued Revenue?

How accrued revenue is determined and recorded varies by industry. Some common occurrences are:

  • Interest Income: Banks and financial institutions often accrue interest income that has been earned but not yet received from loans, investments, or savings accounts. Interest continues to accrue until the customer pays or withdraws their funds.
  • Services Rendered: Service-based businesses, such as consulting firms, may accrue revenue for services they’ve provided but haven’t billed the client for yet. This could include hours worked on a project or services performed but not yet invoiced.
  • Subscription Revenue: Companies that offer subscription-based services (e.g., streaming services, software as a service, etc.) often recognize revenue monthly, annually, or on a per-use basis, even if customers pay in advance. The portion of the subscription that covers the period not yet served is accrued as revenue.
  • Rent Income: Real estate companies or property managers may accrue rent income when tenants owe rent for a particular period, but the payment hasn’t been received by the end of the accounting period.
  • Long-Term Contracts: Construction companies or contractors working on long-term projects may recognize revenue as they make progress on the project, even if they haven’t received payment for the work completed.
  • Advertising Revenue: Media companies or publishers might accrue revenue for advertising services they’ve provided but haven’t yet billed the advertisers for, such as ad campaigns that run over a specific period.
  • Legal or Consulting Services: Law firms or consulting companies often accrue revenue for ongoing legal or consulting services, especially when they work on cases or projects that extend beyond the end of a billing period.
  • Interest on Bonds: Companies that issue bonds may accrue interest revenue that will be paid to bondholders at the end of the bond’s term.
  • Royalties: Content creators, authors, or musicians may accrue royalty income for the use of their intellectual property, such as books, music, or patents, based on contracts or licensing agreements.
  • Shipping or Freight Charges: Shipping companies may accrue revenue for shipping services provided but not yet billed to customers or for goods in transit.

When Does Accrued Revenue Occur?

Accrued revenue occurs when a company has earned revenue but has not yet received cash or other forms of payment for the goods or services provided. This typically happens under the following circumstances:

  • Service or Product Delivery Before Payment: When a company provides services or delivers products to a customer, revenue is generally recognized when the service is performed or the product is delivered, even if the customer has not paid immediately. In such cases, revenue is accrued to reflect that the company has earned income.
  • Long-Term Contracts: In industries where long-term contracts are common, such as construction, engineering, or consulting, revenue may be accrued over time as the company makes progress on the project, even if the customer is billed periodically or upon project completion.
  • Subscription-Based Businesses: Companies that offer subscription-based services, like software as a service (SaaS), streaming, or membership-based platforms, often recognize revenue monthly or annually as the service is provided, even if customers pay in advance.
  • Interest and Investments: Financial institutions accrue interest income on loans or investments over time as interest is earned, regardless of when the customer or borrower makes the actual interest payments.
  • Rent and Leases: Property owners or landlords may accrue rent income based on the terms of a lease agreement, even if the tenant hasn’t made the payment yet.
  • Royalties: Content creators or licensors of intellectual property accrue royalty income based on the usage of their intellectual property as specified in licensing agreements, regardless of when payments are received.
  • Legal and Consulting Services: Law firms, consulting companies, and other service providers often accrue revenue as they provide ongoing services, even if they invoice clients at a later date.
  • Advertising Services: Media companies or advertising agencies may accrue revenue for advertising services provided over a specific period, even if advertisers are billed later.

In each case, accrued revenue serves to match revenue recognition with the actual earning of revenue, providing a more accurate representation of a company’s financial performance in its financial statements. This accrual accounting method helps ensure that financial statements reflect the economic reality of the transactions, even if cash has not yet changed hands. It also helps in assessing a company’s financial health and performance over time.

What Do Entries of Accrued Revenue Look Like?

Accrued revenue entries are accounting entries made to recognize revenue that has been earned but not yet received in cash or recorded in the books. These entries are typically made at the end of an accounting period to ensure that the financial statements accurately reflect the company’s financial position and performance.

The specific entries may vary depending on the accounting method used (e.g., accrual accounting or cash accounting) and the nature of the transaction, but in general accrued revenue entries may look like:

  • Initial Recording of Accrued Revenue: When revenue is earned but not yet received in cash or recorded, an adjusting journal entry is made. This entry recognizes the revenue and records it as an asset on the balance sheet (specifically, in the accounts receivable or accrued revenue account) and as revenue on the income statement.
Debit
Credit
Accrued Revenue
$20,000
Revenue
$20,000
    • Debit: Accrued Revenue (or Accounts Receivable) – This increases the asset on the balance sheet.
    • Credit: Revenue – This recognizes the revenue on the income statement.

  • Recognition of Cash Payment: When the cash is eventually received from the customer, another journal entry is made to remove the accrued revenue from the balance sheet and reflect the actual cash receipt.
Debit
Credit
Cash
$40,000
Accrued Revenue
$40,000
    • Debit: Cash – This increases the cash asset.
    • Credit: Accrued Revenue (or Accounts Receivable) – This decreases the asset on the balance sheet.

  • Adjustments for Unearned or Prepaid Revenue: In some cases, accrued revenue may also involve adjustments for unearned or prepaid revenue. For example, if a customer pays in advance for goods or services that will be delivered over time, the company may initially record this as unearned revenue (a liability) and then recognize it as revenue as it is earned.
Debit
Credit
Unearned Revenue
$60,000
Revenue
$60,000
    • Debit: Unearned Revenue – This decreases the liability on the balance sheet.
    • Credit: Revenue – This recognizes the revenue on the income statement.

What is an Example of an Accrued Revenue Entry?

Entries for accrued revenue are made in a company’s accounting records to recognize revenue that has been earned but not yet received in cash. These entries follow the accrual accounting method and typically involve debiting an income or revenue account and crediting a liability account.

Assuming a scenario where a company has provided services worth $100,000 to a client in December, but the client has not paid by the end of the month, here are the journal entries.

Initial Accrual Entry
(At the end of the period when revenue is earned, but payment is pending)

Debit
Credit
Accrued Revenue
$80,000
Service Revenue
$80,000

This entry recognizes that the company has earned $100,000 in revenue but has not yet received the cash payment. It increases the revenue on the income statement and creates a liability (Accrued Revenue) on the balance sheet.

Cash Receipt Entry
(When the client eventually pays)

Debit
Credit
Cash
$100,000
Accrued Revenue
$100,000

This entry reflects the actual receipt of cash from the client. It reduces the Accrued Revenue liability on the balance sheet and increases the company’s cash balance.

In summary, the initial accrual entry records the revenue that has been earned but not yet received, while the cash receipt entry records the cash when it is received. These entries ensure that the company’s financial statements accurately reflect the revenue it has earned, even if the cash has not yet been received. The specific account names may vary depending on the company’s chart of accounts and accounting standards, but the underlying concept remains the same.

Is Accrued Revenue an Asset?

Yes, accrued revenue is recorded as an asset on a company’s balance sheet. Specifically, it is classified as a current asset because it represents the amount of revenue that the company has earned but has not yet received in cash. Current assets are assets that are expected to be converted into cash or used up within one year or one operating cycle, whichever is longer.

Accrued revenue is considered an asset because it represents a claim or a right to receive cash or other assets from a customer or client in the future. Once the cash is received, the accrued revenue is reduced, and cash or another asset account is increased to reflect the actual receipt of funds.

In summary, accrued revenue is recorded as a current asset because it represents revenue that the company has earned but not yet collected, and it reflects the company’s expectation of receiving payment in the near future. 

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