Accrued Revenue

What Is Accrued Revenue?

Accrued Revenue is the revenue earned through the provision of goods or services for which no money has been exchanged.

These revenues are shown as receivables on the balance sheet to reflect the amount customers owe the company for the items or services they purchased.

Accrued expenses and revenue can be compared and contrasted with realized or recognized revenue.

A sale acknowledged by the seller but not invoiced to the buyer is considered accrued revenue. Businesses that would otherwise have unreasonable delays in revenue recognition adopt this notion.

Since billings may not be completed until the end of a project or on scheduled milestone billing dates, accrued income is relatively frequent in the service sectors. However, manufacturing companies are far less likely to have accrued income because bills are often given as soon as goods are shipped.

To appropriately match revenues with expenses, accumulated income is required.

In the absence of collected income, a business would typically show disproportionately low starting revenue levels and poor profits, which does not accurately reflect the organization's underlying value.

Additionally, since revenues are only recognized at longer intervals when bills are sent, not using accrued revenue tends to produce considerably lumpier revenue and profit recognition.

On the other hand, tracking accumulated income tends to level off reported revenue and profit levels on a month-by-month basis.

Accrued Revenue Vs. Deferred Revenue

Deferred revenue describes when a corporation receives an upfront payment from a client before providing the product or service. In other words, deferred revenue is recorded after payment is received.

On the other hand, Accrued Revenue is recorded ahead of time.

Let's examine the main distinctions between the terms:

• First, all revenue is simultaneously entered into the accrued revenue account. When revenue spreads over time, it is referred to as deferred revenue.
• Cash receipts are the result of accrued revenue input. When receipts and payments are recorded after a cash transaction, it is known as deferred revenue.
• Deferred revenue is considered a liability because it is unearned revenue. However, it is also seen as an asset in the form of accounts receivables.
  

Recording Accrued Revenue

It is shown on a company's financial accounts as earned revenue on its income statement and as an adjusting journal entry under current assets on the balance sheet.

The payment is recorded as an adjusting entry to the asset account for accumulated revenue at the time it is made. This does not affect the income statement; only the balance sheet does.

Let's use an example to understand better.

Travelport LTD IT Services pledges to develop flight navigation software for Delta Airlines within a year for a fee of $120,000. The software's first milestone, worth $60,000, is supposed to be delivered by Travelport in six months, per the contract.

After another six months, a second milestone will be delivered, signaling the conclusion of the contract. Unfortunately, the agreement only permits a $120,000 billing after the project. Travelport must therefore make the following notebook entry to reflect attaining the first milestone (the sixth month):

Travelport must enter the following journal entry to reverse the initial accrual after reaching the second milestone and billing the client for $120,000. In addition, the second journal entry for the $120,000 invoice must be entered.

The income statement shows the change in revenue, whereas the balances relating to accrued revenue are debit balances on the balance sheet.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Accrued Income
• Accrued Interest
• Accrued Liability
• Deferred Acquisition Costs (DAC)
• Deferred Income Tax