An accountant records adjustments for accrued revenues through debit and credit journal entries in defined accounting periods to account for accrued revenues accurately and so that the balance sheet remains in balance.
What Is Accrued Revenue?
Accrued revenue refers to a company's revenue that has been earned through a sale that has already occurred, but the cash has not yet been received from the paying customer.
Accrued revenue normally arises when a company offers net payment terms to its clients or consumers. In this scenario, if a company offers net-30 payment terms to all of its clients, a client can purchase an item on April 1 and is not required to pay until May 1. For the entire month of April, the company would record accrued revenue, and then it would create an adjusting entry in May to account for the payment.
How Are Adjustments Recorded for Accrued Revenue?
When accrued revenue is initially recorded, the amount of accrued revenue is recognized on the income statement as revenue, and an associated accrued revenue account on the company's balance sheet is debited by the same amount, potentially in the form of accounts receivable.
When payment is due and the customer makes payment, an accountant for that company would record an adjustment to accrued revenue. The accountant would make an adjusting journal entry in which the amount of cash received by the customer would be debited to the cash account on the balance sheet, and the same amount of cash received would be credited to the accrued revenue account or accounts receivable account, reducing that account.
This keeps the balance sheet in balance, tracks the correct amount of revenue accrued, tracks the correct amount of cash received and does not change the revenue recognized on the income statement.