Accrued Revenue

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Accrued Revenue

Accrued revenue is revenue a business has earned by providing goods or services but has not yet received payment for. Under accrual accounting, these amounts are recorded as receivables on the balance sheet to reflect what customers owe.

Key takeaways

  • Accrued revenue follows the revenue recognition principle: record revenue when earned, not when cash is received.
  • It is recorded through an adjusting journal entry at period end so financial statements reflect earned revenue for that period.
  • Common in service and long-term contract businesses where work spans multiple accounting periods.
  • The counterparty records the same transaction as an accrued expense (a liability).

Accounting principles behind accrued revenue

Accrued revenue stems from accrual accounting and the revenue recognition and matching principles:
* Revenue recognition: record revenue in the period when performance obligations are satisfied (when goods/services are delivered), regardless of cash timing.
* Matching principle: match revenues with the expenses incurred to generate them, producing more accurate period profit figures.

Standards such as the joint FASB/IASB revenue guidance (Topic 606) establish an industry-neutral model for recognizing revenue from contracts with customers to improve comparability across companies.

When and why businesses use accrued revenue

Accrued revenue prevents distorted or “lumpy” reporting that would occur if revenue were only recognized when cash is received or when long projects finish. Typical situations:
* Service contracts delivered over months (consulting, software services).
Long-term construction or engineering contracts that span multiple reporting periods.
 Aerospace/defense programs that deliver components periodically but bill infrequently.
* Landlords or subscription services when revenue is earned before payment is received.

How to record accrued revenue (journal entries)

  1. At period end, when revenue is earned but not billed or paid:
  2. Debit: Accounts Receivable (or Accrued Revenue) — asset

  3. Credit: Revenue — income statement

  4. When cash is later received:

  5. Debit: Cash — asset
  6. Credit: Accounts Receivable (or Accrued Revenue)

If an accrual is recorded as an adjusting entry, companies may reverse it in the next period when invoices are issued to prevent double-counting.

Examples

  • A construction firm recognizes a portion of contract revenue each month as work progresses rather than recognizing the full contract value only at completion.
  • An aerospace contractor records revenue as deliverables are completed even if the customer is billed annually.
  • A landlord recognizes rent revenue for the month in which it is earned even if tenant payment arrives at month-end.

Conclusion

Accrued revenue ensures financial statements reflect the economic activity of a period by recording revenue when it is earned. Properly accounting for accrued revenue improves comparability, aligns revenue with related expenses, and provides a clearer view of business performance.