Accrued Revenue

By 
ALICIA TUOVILA
 
 
Updated Aug 9, 2019
What Is Accrued Revenue?
Accrued revenue is revenue that has been earned by providing a good or
service, but for which no cash has been received. 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.

KEY TAKEAWAYS

 Accrued revenue is a product of the revenue recognition principle which

requires that revenue be recorded in the period in which it is earned.
 Accrued revenue is recorded with an adjusting journal entry which
recognizes items that would otherwise not appear in the financial
statements at the end of the period.
 It is commonly used in the service industry, where contracts for services
may extend across many accounting periods.
Sorry, the video player failed to load.(Error Code: 101104)

Accrued Revenue

Understanding Accrued Revenue

Accrued revenue is the product of accrual accounting and the revenue
recognition and matching principles. The revenue recognition principle requires
that revenue 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. The matching principle is an accounting concept that seeks to tie
revenue generated in an accounting period to the expenses incurred to generate
that revenue. Under generally accepted accounting principles (GAAP), accrued
revenue is recognized when the performing party satisfies a performance
obligation. For example, revenue is recognized when a sales transaction is made
and the customer takes possession of a good, regardless of whether the
customer paid cash or credit at that time.

Accrued revenue often appears in the financial statements of businesses in the

service industry, 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 would be lumpy, giving a
false impression of the true value of the business.

For example, a construction company will work on one project for many months.
It needs to recognize a portion of the revenue for the contract in each month as
service is being rendered, rather than waiting until the very end of the contract to
recognize the full contract revenue in the final month.

In 2014, the Financial Accounting Standards Board and the International

Accounting Standards Board introduced a joint 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 annual reporting periods beginning after December
15, 2016.

Recording Accrued Revenue

Accrued revenue is recorded in the financial statements through the use of
an adjusting journal entry. The accountant debits an asset account for accrued
revenue which is reversed when the exact amount of revenue is actually
collected, crediting accrued revenue. Accrued revenue covers items that would
not otherwise 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.

When accrued revenue is first recorded, the amount is recognized on the income

statement through a credit to revenue. 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 the asset account for accrued
revenue, only affecting the balance sheet. The accountant would make a 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 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. Similar to the example of the
construction company above, companies in the aerospace and defense sectors
might accrue revenue as each piece of military hardware is delivered, even if
they only bill the U.S. Federal government once a year.