What is 'Accrued Revenue'
Accrued revenue is an asset class for goods or services that have been sold or completed but the associated revenue that has not yet been billed to the customer. Accrued revenue – which may include income that is due in arrears – is treated as an asset on the balance sheet rather than a liability. This reporting is important to the valuation of a company, particularly in the service industry where billing typically occurs after the work or service is complete because this asset class ensures all earned revenue is reported.
BREAKING DOWN 'Accrued Revenue'Accrued revenue must be items that have been earned. The associated revenue must have been incurred due to a sale that has occurred and is finalized. Although back office functions such as invoicing may not have been performed, accrued revenue must still be reported under generally accepted accounting principles (GAAP). When one company records accrued revenues on its financial statements, the buyer or borrower recognizes a deferred expense.
Entry Onto Financial Statements
Accrued revenue is only placed into the financial statements through the use of an adjusting entry. This entry is often reversed in future periods to eliminate the accrual. In this future period, when the exact amount of revenue is actually collected, this exact dollar figure is used to record the actual revenue that arose. Accrued revenue covers items that will not appear in the general ledger at the end of the period.
Example of Accrued Revenue
A loan spanning more than one calendar year is an example of accrued revenue. If the agreement is made in December but the entirety of the loan – including interest – is to be paid off in January, the revenue actually earned in December will not be recorded without an adjusting entry. This is because the cash transaction will not occur until January. The borrower is not obligated to pay until the next year although interest has been incurred during December. For this reason, an accrued revenue journal entry is utilized to account for the revenue earned but not yet collected in December.
Cash Vs. Accrual Methods of Accounting
Accrued revenue is a feature of accrual accounting. This method of accounting requires transactions to be recorded in the period when the economic benefit occurs and disregards when the cash aspect of a transaction has occurred. Alternative, the cash basis of accounting does not require the use of accrued revenues, as the entry is recorded when the cash is exchanged.