What Is Accrued Revenue

Accrued revenue is a type of revenue that has been earned by a business for providing goods or services but has not yet been billed to the customer or received in cash. It is recognized in the accounting records before the company issues an invoice or collects payment. 

This type of revenue arises when the earning process is complete, meaning the company has fulfilled its part of the transaction, but the payment is still pending, often due to timing differences in billing cycles or contractual agreements. 

In financial reporting, accrued revenue is recorded as an asset on the balance sheet, typically under accounts receivable, because it represents a legal right to receive money in the future. This approach aligns with the accrual method of accounting, where income is recognized when earned, regardless of when cash is received.

Why Is Accrued Revenue Important

Accrued revenue is important because it ensures that a company’s financial statements accurately reflect the revenue earned during a specific accounting period, even if payment hasn’t been received yet. 

This provides a more complete and realistic view of the company’s financial performance and profitability. When businesses recognize income when it is earned rather than when cash is received, they can better match revenues with the expenses incurred to generate them. 

This matching principle assesses operational efficiency and makes informed decisions. Without accrued revenue, companies might underreport their earnings and misrepresent their financial position, which could mislead investors, lenders, and other stakeholders.

Principals of Accrual Accounting

The principles of accrual accounting are fundamental rules that guide how and when revenues and expenses are recorded. These principles ensure that financial statements reflect a company’s true financial position and performance within a specific period, regardless of when cash transactions occur. The main principles include:

• Revenue Recognition Principle: Revenue should be recognized when it is earned and realizable, not necessarily when cash is received. This means income is recorded when a product is delivered or a service is performed, even if payment comes later.
• Matching Principle: Expenses should be recognized in the same accounting period as the revenues they helped generate. This ensures that income statements show the actual costs associated with earning the reported revenues.
• Time Period Assumption: Financial activities are reported for specific and consistent time periods—such as months, quarters, or years—so users of financial statements can compare performance over time.
• Accrual Principle: Transactions are recorded when they occur, not when cash is exchanged. This applies to both revenues and expenses, ensuring they are reflected in the appropriate accounting period.
• Consistency Principle: Once a company adopts an accounting method (like accrual accounting), it should use it consistently across periods, unless a change is justified and disclosed. This allows for reliable comparison over time.

When Does Accrued Revenue Occur

Accrued revenue occurs when a business has earned income by delivering goods or services, but has not yet billed the customer or received payment. This typically happens at the end of an accounting period, when companies close their books and need to recognize all revenue that has been earned, even if the cash hasn’t been collected. 

It often arises in industries with ongoing services, long-term projects, or delayed billing schedules—such as consulting, construction, or subscription-based businesses. In these cases, the revenue is recorded in the period it is earned to accurately reflect the company’s financial activity, even though the cash inflow will happen in a future period.

How to Record Accrued Revenue

Accrued revenue is recorded using adjusting journal entries in accordance with double-entry accounting principles. When a company earns revenue but hasn’t billed the customer or received payment, it must recognize this income in the correct accounting period. 

Later, once the billing is done or cash is received, the original accrual is reversed or adjusted accordingly. In cases where interest income accrues but hasn’t yet been paid, it’s recorded under a current asset called accrued interest receivable.

Recording Adjustments for Accrued Revenue

Let’s say a business has delivered a service worth €18,750 but hasn’t yet invoiced the customer. The initial entry to record the earned revenue would be:

Initial Accrual:

When the invoice is issued later, the accrued revenue must be cleared from the books by reversing the original entry:

Reversing Entry:

After invoicing, the company follows its standard billing procedure, recording the receivable:

Recording Invoice to Customer:

Once the customer settles their bill and payment is received, the cash is recorded, and the receivable is cleared:

When Cash Is Received:

Recording Accrued Interest Revenue

If a company earns €620 in interest during the month, but payment hasn’t been received yet, it records that interest as income using this entry:

Accrual for Interest Earned:

When the interest is actually paid by the borrower or account holder, the earlier accrual is reversed:

Cash Receipt for Interest:

Is Accrued Revenue an Asset

Yes, accrued revenue is an asset. It represents money that a company has earned by providing goods or services but has not yet received in cash or invoiced. Since the company has a right to receive this money in the future, it is considered an account receivable and is recorded as a current asset on the balance sheet.

Accrued revenue typically appears under labels like "Accrued Receivables" or "Unbilled Revenue", depending on the accounting system used. It remains an asset until the company sends an invoice or receives payment, at which point it is reclassified or offset by cash or billed receivables.

Accrued Revenue vs Deferred Revenue

Accrued revenue and deferred revenue are two accounting concepts that deal with the timing of revenue recognition, but they represent opposite situations.

Accrued revenue refers to income a company has earned by delivering goods or services but has not yet billed the customer or received payment. It is recorded as a current asset on the balance sheet, because it reflects the company’s right to collect money in the future. This type of revenue is recognized before any cash is exchanged, based on the accrual accounting principle that income should be recorded when earned.

In contrast, deferred revenue (also called unearned revenue) refers to money a company has received in advance for goods or services it has not yet delivered. Since the company still owes the customer the product or service, this revenue is not yet earned and is recorded as a liability on the balance sheet. Over time, as the company delivers the product or performs the service, the deferred revenue is gradually recognized as actual revenue.

Accrued Revenue Examples

Here are several examples that illustrate how accrued revenue works in different business scenarios:

• Consulting Services: A consulting firm completes a project for a client on June 28, but the invoice won’t be sent until July 5. Even though no invoice has been issued and no payment has been received in June, the revenue is accrued in June because the work was finished during that month.
• Interest Income: A company holds a bond that earns interest of €300 every month. At the end of March, the company hasn’t yet received the cash for that month’s interest, but it still records €300 as accrued interest income to reflect the revenue it earned.
• Software Development: A software company is halfway through a six-month project valued at €60,000. By the end of month three, they have completed 50% of the work. The company can accrue €30,000 in revenue, even if no billing or payments have occurred yet, because that portion of the work has already been delivered.
• Subscription Services with Delayed Billing: A digital marketing platform provides monthly services but bills customers quarterly. At the end of month one, the service has been delivered, but no invoice has been sent. The company records one-third of the quarterly fee as accrued revenue.‍
• Legal Services on Retainer: A law firm agrees to provide legal support over a year for €12,000, billed biannually. After the first quarter, €3,000 worth of legal services have been provided, but no invoice has gone out. The firm accrues that €3,000 to reflect the work already performed.