When it comes to operating a business, some of the most important metrics to track include the amount of revenue coming through the door, and whether that's sufficient to pay for the various costs incurred through operating the business. While revenue is easy to think about as "automatic" when the sale of a good or exchange of service happens, in reality, revenue is not always as liquid as it seems. Only when revenue is received in the form of an immediate cash payment does it truly qualify as revenue. Instead, accrued revenues are more likely for a business, especially when it comes to accounting best practices. Typically, an accountant will record adjustments for accrued revenues through debit and credit journal entries in defined accounting periods. This helps 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 decide to purchase an item on April 1; however, they would not be required to pay for the item until May 1. For example, if the item costs $100, for the entire month of April, the company would record accrued revenue of $100. Then, when May 1 rolls around and the payment is received, the company would then create an adjusting entry of $100 to account for the payment.
When accrued revenue is recorded, 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, usually under accounts receivable.
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 the 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 standard practice 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.