Unbilled Accounts Receivable (Unbilled AR) refers to revenue that has been recognized but not yet billed to the customer. Unbilled AR typically represents the value of goods or services that a business has provided to its customers but has not yet been invoiced. It is essentially a form of accounts receivable that has not been converted into an invoice, and therefore, it has not yet been recorded as revenue on the company’s financial statements.
Unbilled AR is common in businesses that use accrual accounting, where revenue is recognized when goods are delivered or services are performed, regardless of whether an invoice has been issued. This is in contrast to cash accounting, where revenue is recognized when payment is received.
Recognition of Revenue: In accrual accounting, revenue is recognized when it is earned, not necessarily when payment is received. This means that revenue can be recognized when goods or services are delivered, even if the customer has not been billed.
Timing Differences: Unbilled AR arises due to timing differences between the point at which revenue is recognized and the point at which it is billed. It is a common feature in businesses that have long-term contracts, subscriptions, or service agreements.
Importance: Unbilled AR is important for financial reporting and analysis because it represents revenue that will eventually be realized once the invoices are issued. It can have an impact on a company’s revenue, accounts receivable, and overall financial health.
Management: Companies need to track the unbilled AR amounts and ensure that invoices are eventually generated and sent to customers. Delayed billing can affect a company’s cash flow and financial performance.
Accounting Entries: When an invoice is eventually generated for Unbilled AR, the accounting entries typically involve debiting Accounts Receivable and crediting Revenue, which converts the unbilled revenue into billed revenue.
Accounting Unbilled AR is a crucial process for businesses that use accrual accounting. Unbilled receivables represent revenue that has been recognized but has not yet been invoiced to the customer. Here’s how to account for unbilled receivables:
Initial Recognition: When goods or services are delivered or performed, and the revenue is earned based on the terms of the contract, a company recognizes the revenue in financial statements. This recognition is typically done through a journal entry that debits an appropriate revenue account and credits an unbilled receivables account.
Create an Unbilled Receivables Account: A company should establish an “Unbilled Receivables” or a similar account on its balance sheet to track the amounts of revenue that have been recognized but not yet invoiced. This account is typically listed as an asset.
Regularly Review and Update: A company should regularly review its financial records to identify unbilled revenue. This may involve reviewing contracts, project completion, or service delivery to ensure revenue recognition is accurate.
Invoicing Process: When it’s time to invoice the customer, a business should create an invoice based on the terms of the contract or agreement. This invoice should include all relevant details, such as the nature of the goods or services provided, quantities, pricing, and any other contractual terms.
Record the Invoice: A company should record the invoice in your accounting system. This typically involves a journal entry that debits the Unbilled Receivables account and credits the Accounts Receivable account. By doing this, it is essentially transferring the recognized revenue from the Unbilled Receivables account to the Accounts Receivable account.
Recognize Cash Receipts: When the customer makes a payment for the invoiced amount, a company should record the cash receipt by debiting the Accounts Receivable account and crediting the Cash or Bank account.
A business provides consulting services, and in January, it completes a project worth $10,000 but does not invoice the client until February. The following journal entries and cash receipt would be recorded:
Debit Unbilled Receivables | Credit Consulting Revenue |
|---|---|
$10,000 | $10,000 |
Debit Accounts Receivables | Credit Unbilled Receivables |
|---|---|
$10,000 | $10,000 |
Debit Cash (or Bank) | Credit Accounts Receivable |
|---|---|
$10,000 | $10,000 |
This process ensures that revenue is accurately recognized and that the company’s financial statements reflect the true state of accounts receivable.
Keep in mind that specific accounting practices and systems may vary by company and industry, and it’s important to follow generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS) as applicable to your business.
Unbilled receivables, or Unbilled AR, occur as a result of the recognition of revenue in a business’s financial statements before an invoice has been issued to the customer. This situation arises due to the following common scenarios:
Accrual Accounting: Unbilled receivables are more likely to occur in businesses that use accrual accounting, where revenue is recognized when it is earned, not necessarily when cash is received. Accrual accounting requires recognizing revenue when goods are delivered, services are performed, or other revenue-earning events occur, regardless of whether an invoice has been sent.
Long-Term Contracts: Unbilled receivables are often associated with long-term contracts, projects, or service agreements. In these cases, businesses may provide goods or services over an extended period, and it’s not practical or appropriate to bill the customer immediately after each transaction. Instead, revenue is recognized as milestones are reached or services are delivered.
Subscription-Based Services: Companies that offer subscription-based services, such as SaaS or cloud services, often have unbilled receivables. These businesses recognize monthly or annual subscription revenue even if invoices are sent to customers at a later date.
Service Completion Before Billing: Unbilled receivables can occur when services are completed or goods are delivered, but the billing process lags behind due to administrative delays, customer-specific billing cycles, or other operational reasons.
Billing Cycle: In some cases, the timing of a business’s billing cycle may not align with the timing of revenue recognition. For example, a business may recognize revenue at the end of a month but only bill customers at the beginning of the following month.
Prepayments or Advance Payments: When customers make prepayments or advance payments for goods or services, businesses may recognize the prepayment as unearned revenue (a liability) until the goods or services are delivered. Once delivered, the unearned revenue is reclassified as revenue, but the customer may not be immediately billed for the recognized revenue.
Large Projects and Milestones: In industries like construction or consulting, projects often involve multiple milestones. Revenue may be recognized as each milestone is achieved, but invoices may be sent at the end of the project or after significant milestones have been completed.
Contractual Agreements: The terms of contractual agreements with customers may allow for revenue recognition at specific points in time or upon the occurrence of certain events, even if invoices are sent later.
Unbilled receivables can have implications for a company’s cash flow and financial reporting. Businesses need to carefully manage and track these amounts, ensuring that invoices are eventually issued to customers to convert unbilled revenue into billed revenue.
Dealing with unbilled receivables, or Unbilled AR, is an essential aspect of financial management, particularly for businesses using accrual accounting. These are steps to effectively manage unbilled receivables:
Regularly Identify Unbilled Revenue: Maintain a systematic process for recognizing when unbilled revenue occurs.
Document Revenue Recognition: Ensure that revenue recognition aligns with accounting policies and is documented accurately.
Create an Unbilled Receivables Account: Establish an “Unbilled Receivables” or similar account on your balance sheet to track unbilled revenue. This account should be listed as an asset.
Billing and Invoicing Process: Develop a structured billing and invoicing process to ensure that unbilled revenue is eventually converted into billed revenue.
Generate and Send Invoices: Create invoices based on the terms of the contract, including details of the goods or services provided, quantities, pricing, and any other contractual terms. Send these invoices to your customers.
Record Invoices: Record the invoices in an accounting system by creating journal entries that debit the Unbilled Receivables account and credit the Accounts Receivable account. This transfer effectively converts unbilled revenue into billed revenue.
Implement Controls: Put in place controls and checks to ensure that invoices are generated promptly and accurately. This might include an approval process to verify the accuracy of invoices before they are sent to customers.
Billing Schedules: Establish billing schedules that align with your revenue recognition practices. Consider the timing of billable events, project milestones, or service completion.
Customer Communication: Keep lines of communication open with customers regarding billing expectations. This is particularly important when billing cycles do not align with revenue recognition events.
Payment Terms and Collections: Set clear payment terms and actively manage collections to ensure that customers pay their invoices promptly. Unbilled receivables can have an impact on cash flow, so efficient collections are important.
Regular Reconciliation: Periodically reconcile Unbilled Receivables account to verify that all unbilled revenue has been correctly billed to customers. Ensure that there are no discrepancies.
Review Contracts and Agreements: Review customer contracts and agreements to ensure that they align with the revenue recognition and billing practices.
Financial Reporting and Disclosure: Accurately report unbilled receivables in financial statements and disclosures, following accounting standards and guidelines, such as ASC 606, and providing transparency to stakeholders.
Unbilled AR and Accrued Revenue are related concepts but have differences. They both involve recognizing revenue before it is received in cash and before an invoice is issued to the customer, but they differ in how and when the revenue is recognized and in the context of their usage:
Unbilled AR refers to revenue that has been recognized as earned but has not yet been invoiced to the customer. This situation typically arises in businesses that use accrual accounting. Revenue is recognized when it is earned (i.e., when goods or services are delivered), even if the customer has not been billed. Unbilled AR represents the value of the services or goods provided to the customer, which will eventually be billed and converted into cash.
Accrued Revenue refers to revenue that has been earned but not yet received in cash or recorded in the accounting records. Accrued revenue can arise from various sources, such as interest income, rental income, or service fees. It typically involves situations where a business has provided services or goods to a customer, but the payment is expected at a later date. Accrued revenue is recognized as a liability on the balance sheet (e.g., “Accrued Revenue” or “Unearned Revenue”), representing money that the company expects to receive in the future.
In summary, the key distinction between Unbilled AR and Accrued Revenue is the way they are recorded on the balance sheet. Unbilled AR represents revenue that has been recognized but not invoiced to the customer and is listed as an asset (an “Unbilled Receivables” account). In contrast, Accrued Revenue represents revenue that has been recognized but not yet received and is listed as a liability (an “Accrued Revenue” or “Unearned Revenue” account).
Unbilled AR and Deferred Revenue, while related to the timing of recognizing revenue, are not the same. They represent different stages in the revenue recognition process and have distinct accounting treatments:
Unbilled AR refers to revenue that has been recognized as earned but has not yet been invoiced to the customer. It represents services or goods provided to the customer, for which revenue recognition has occurred, but the billing process has not taken place. Unbilled AR is typically listed as an asset on the balance sheet because it represents money that the company expects to receive in the future once invoices are generated and sent to the customer.
Deferred Revenue represents cash that a company has received from a customer in advance of delivering goods or services. It represents a liability on the balance sheet because the company has an obligation to provide goods or services in the future. As services are provided or goods are delivered, the deferred revenue is gradually recognized as revenue over time. This recognition process typically aligns with the delivery of services, not with billing cycles.