Accrued revenues are revenues that have been received but not yet recognized.

Q: What is meant by income accrued but not received?

Accrued income is money thats been earned but has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time—but only pay shareholders once a year—are, by definition, accruing their income.

Accrued revenue is a sale that has been recognized by the seller, but which has not yet been billed to the customer. This concept is used in businesses where revenue recognition would otherwise be unreasonably delayed. Accrued revenue is quite common in the services industries, since billings may be delayed for several months, until the end of a project or on designated milestone billing dates. Accrued revenue is much less common in manufacturing businesses, since invoices are usually issued as soon as products are shipped.

The concept of accrued revenue is needed to properly match revenues with expenses. The absence of accrued revenue would tend to show excessively low initial revenue levels and low profits for a business, which does not properly indicate the true value of the organization. Also, not using accrued revenue tends to result in much lumpier revenue and profit recognition, since revenues would only be recorded at the longer intervals when invoices are issued. Conversely, recording accrued revenue tends to smooth out reported revenue and profit levels on a month-by-month basis.

Accounting for Accrued Revenue

In order to record accrued revenue, you should create a journal entry that debits the accrued billings account (an asset) and credits a revenue account. This results in revenue being recognized in the current period. The entry is reversed when a billing is actually sent to the customer, so that the revenue stated on the billing is offset by the negative revenue figure in the reversing entry. The net effect is that revenue is only recognized in the current period. If there is a difference between the accrued revenue amount and the amount eventually billed, then this difference will impact revenue in the period in which the billing is issued.

If a customer were to submit a payment before a billing was issued to it (perhaps as part of a standardized, periodic payment arrangement), then the appropriate accounting would be to debit the cash account and credit the accrued billings account. Doing so reduces the balance in the accrued billings account.

Accrued revenue is not recorded in cash basis accounting, since revenue under that method is only recorded when cash is received from customers.

Fraudulent Use of Accrued Revenue

The accrued revenue concept has been used to fraudulently increase the revenues of a business with a journal entry. These entries are usually instigated by senior management, which wants to artificially boost sales and profits in an effort to convince investors to bid up the share price of company stock. They can sometimes hide these entries by later declaring a large reserve for expected losses, and writing off the accrued revenue at that time. Otherwise, they must provide the firm’s auditors with documentation for the accrued revenue, which usually uncovers the scam.

Example of Accrued Revenue

ABC International has a consulting project with a large client, under which the consulting agreement clearly delineates two milestones, after each of which the client owes $50,000 to ABC. Since the agreement only allows for billing at the end of the project for $100,000, ABC must create the following journal entry to record reaching the first milestone:

DebitCreditAccrued billings50,000 Consulting revenue 50,000

At the end of the next month, ABC completes the second milestone and bills the client for $100,000. It records the following entry to reverse the initial accrual, and then records the second entry to record the $100,000 invoice:

DebitCreditConsulting revenue50,000 Accrued billings 50,000

DebitCreditAccounts receivable100,000 Consulting revenue 100,000

Presentation of Accrued Revenue

The debit balance in the accrued billings account appears in the balance sheet, where it is stated as a current asset. The monthly change in the accrued revenue account appears in the income statement, within the revenue line item at the top of the statement. It is rarely reported separately from billed revenue on the income statement.

Accrued Revenue vs. Deferred Revenue

The reverse of accrued revenue (known as deferred revenue) can also arise, where customers pay in advance, but the seller has not yet provided services or shipped goods. In this case, the seller initially records the received payment as a liability and later converts the entry into a sale when the transaction is completed.

At a basic level, the concept of doing business is easy. You provide a product or service to a client who needs it in exchange for an agreed-upon price.

Depending on the nature of your business or the type of clients you deal with, the exchange may not be immediate. This means you'll perform the service or deliver the goods and wait for payment at a later date.

In essence, it counts as a sale, but the revenue is yet to reflect in your cash reserves or bank accounts. So, how do you address such revenue in your financial statements?

Fortunately, such circumstances have been accounted for under the Generally Accepted Accounting Principles(GAAP) as part of accrual accounting. In this article, you'll find the accrued revenue definition, learn how to record it, and see some examples.

What is accrued revenue?

Accrued revenue is earnings from providing a product or service, where payment has yet to be issued to the provider. Due to this, accrued revenue is recorded as a receivable owed by the customer for the business transaction.

For example, a SaaS company may acquire a customer who needs a service for the next six months. Under the contract terms, the business may agree to deliver the service at the price of $1,000 and send an invoice at the end of the month, which is payable on the 15th of the next month. From that point until the end of the contract, the SaaS company will have $1000 in accrued revenue from that particular customer.

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When does accrued revenue occur?

You will only realize accrued revenue when there is a mismatch between the time of delivery of goods and services, and payment.

This can occur in instances such as:

Long-term projects –This applies to the long-term projects where you'll book revenue in relation to the percentage of completion.
Milestones – With large orders, you may have to complete bit by bit and book a certain amount of revenue based on the milestones you reach.
Loans – If you loan money to other businesses or people, the interest income will qualify as accrued revenue. This is also known as interest revenue or accrued interest income.

Two main accrual accounting principles

When it comes to accrual accounting, two principles govern it. These are the Matching and Revenue recognition principles.

Matching principle –You should record expenses and the revenue they help generate in the same accounting period when following this principle.
Revenue recognition principle – Revenue is recorded in the same accounting period it is earned under the revenue recognition principle. Once you deliver the product or service, that revenue qualifies as earned.

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How to record accrued revenue

As a SaaS company, you will likely encounter accrued revenue, especially if you also have a B2B model. Whereas it may seem complicated, recording accrued revenue is fairly straightforward if you have a basic understanding of bookkeeping and financial statements such as the balance sheet, trial balance, and income statement.

What you need to know about adjusting journal entries

With cash basis accounting, you'll debit accrued income on the balance sheet under the current assets as an adjusting journal entry. On the income statement, you'll record it as earned revenue.

When you receive the payment, record it in the revenue account as an adjusting entry. Doing this will only affect the balance sheet and not the income statement.

Accrued revenue criteria you need to keep in mind

When it comes to making an accrued revenue journal entry, there's one thing that you need to keep in mind at all times; each transaction will appear on the income statement as earned revenue and on the balance sheet as a current asset.

Аccrued revenue vs deferred revenue

Another concept similar to accrued revenue that you should be familiar with is deferred revenue. Such revenue occurs when a client pays you upfront for goods and services you are yet to deliver. Whereas accrued revenue is recognized before you receive the cash, deferred revenue is recognized after you receive the payment.

With accrued revenue and deferred, it's essential to know how they differ. Here are some distinctions to keep in mind:

Deferred revenue can be spread over time, but an entry for accrued income occurs once for the whole amount.
Since deferred revenue is unearned revenue, it is treated as a liability. On the other hand, accrued revenue is classified as an asset under the accounts receivable.
Along with an accrued entry also comes the issuance of cash receipts. However, deferred revenue acts as recognition of payments and receipts after payment.

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Accrued revenue examples

Understanding the theoretical aspect of accrued revenue is great. However, it will count for nothing if you cannot put it into practice. Here are some examples of accrued revenue to show you how to apply your knowledge in real-life business scenarios.

Example 1

Suppose that company ABC comes into an agreement with customer Y to deliver 24 pieces of machinery in a year. Being a long-term project, company ABC can choose to recognize each machinery or set of machinery delivered as a milestone, for which they'll recognize the service revenue upon completion.

Regardless of whether company ABC will bill for the service after each milestone or at the end of the year, it will count as accrued revenue. However, in the books of accounts of client Y, the same will be recorded as accrued expenses.

Example 2

Let's assume you run a consultancy agency for which you charge $20 per hour of consultation. In one project, a corporate client requests for 100 hours of consultations to be completed in four months. By the end of February, you have already offered 50 hours of consultation. However, you will only send the invoice worth $2,000 at the end of April upon completion of the project.

In your books of accounting, you'll record $500 as accrued revenue for January, February, March, and April. When you finally send the invoice, you'll convert it into the accounts receivable and then convert it into cash once the payment is made.

Accrued revenue FAQ

As you try to understand accrued revenue, it's understandable if some things are still unclear. As you learn more and put your knowledge into practice, everything will become clearer. In the meantime, here are the answers to some of the frequently asked questions about accrued revenue.

What is an accrued expense?

An accrued expense is a corporate finance term that refers to expenses that are recorded in accounting books before they have been paid. As the purchasing firm, you will record it when you incur the expenses and not when you pay them.

In essence, an accrued expense represents a company's obligation to make a cash payment in the future. Therefore, they are recorded as current liabilities in the balance sheet.

Is accrued revenue an asset?

Though accrued revenue represents revenue that you have earned but has not been paid for, it qualifies as an asset. However, it's important to note that it is not as valuable as cash as it requires more effort to bill and convert into cash.

Whereas accrued revenue may demonstrate a capacity to acquire customers, it shows that your collection process is inefficient if it's too high.

Is unearned revenue accrued revenue?

Though accrued revenue and unearned revenue are confusing to many, they couldn't be more different. Accrued revenue represents revenue that you have earned and for which you are yet to receive payment. Unearned revenue, also referred to as deferred revenue, refers to payments you have received for services you are yet to render.

Are accrued revenues on income statements?

To put it simply, yes. Once recognized, accrued revenue is recorded as revenue on the income statement. It is also recorded on the balance sheet under the accounts receivable.

Is accrued revenue recognized?

Accrued revenue is revenue that is recognized but is not yet realized. In other words, it is the revenue earned/recognized by a business for which the invoice is yet to be billed to the customer. It is also known as unbilled revenue.

What kind of revenues have been received but not yet recognized?

What is the meaning of accrued revenue?

What Is Accrued Revenue? Accrued revenue is revenue that has been earned by providing a good or service, but for which no cash has been received. Accrued revenues are recorded as receivables on the balance sheet to reflect the amount of money that customers owe the business for the goods or services they purchased.

What is meant by income accrued but not received?

Accrued income is money that's been earned but has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time—but only pay shareholders once a year—are, by definition, accruing their income.