What Is Accrued Revenue?
Accrued revenue is revenue that has been earned by providing a good or service, but for which no payment has been received because the customer has yet to be billed. 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.
Understanding Accrued Revenue
Accrued revenue is a feature of accrual accounting and the matching principle, which is an accounting concept that matches revenues with expenses, regardless of when cash transactions occur. It requires that transactions be recorded in the same accounting period in which they are earned, rather than when the cash payment for the product or service is received. Under generally accepted accounting principles (GAAP), accrued revenue is recognized when the performing party satisfies a performance obligation, ie., a sale has occurred and is finalized.
Accrued revenue often appears in the financial statements of service business, because revenue recognition would otherwise be delayed until the work or service was finished, which might last several months – in contrast to manufacturing, where invoices are issued as soon as products are shipped. Without using accrued revenue, revenues and profit recognition would be lumpy, giving a false impression of the true value of the business.
In 2014, the Financial Accounting Standards Board and the International Accounting Standards Board introduced Accounting Standards Code Topic 606 Revenue From Contracts With Customers, to provide an industry-neutral revenue recognition model to increase financial statement comparability across companies and industries. Public companies had to apply the new revenue recognition rules for quarterly reports starting in Q1 2018 and for the calendar year ending December 31, 2018.
Recording Accrued Revenue on Financial Statements
Accrued revenue is recorded in the financial statements through the use of an adjusting journal entry. The accountant debits accrued billings, which is reversed when the exact amount of revenue is actually collected, crediting accrued billings. Accrued revenue covers items that will not appear in the general ledger at the end of the period. When one company records accrued revenues, the other company will record the transaction as an accrued expense, which is a liability on the balance sheet.
Recording Adjustments for Accrued Revenue
When accrued revenue is first 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 a customer makes payment, an accountant for the 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.
Examples of Accrued Revenue
Accrued revenue is often recorded by companies engaged in long-term projects like construction or large engineering projects. The construction company might record accrued revenue at different stages in the project. Similarly, companies in the aerospace and defense sectors might accrue revenue as each piece of military hardware is delivered, even if the U.S. Federal government is only billed once a year.