The Ultimate Guide to Accrued Revenue: Everything You Need to Know

The numbers in your financial statements should reflect the business activities carried out in the specific period of those statements.

Having said that — invoice generation and cash earned as payments don’t always line up in the same period that the business transaction occurred.

Based on the nature of the business that you are in, you may deliver the product or provide the service — and end up getting paid for it at a later date. 

While this is a sale, by all means, it may be a while before the revenue is reflected in your bank account. This revenue that is earned but not received yet is called accrued revenue. 

• How do you record accrued revenue in your financial statements?
• How is accrued revenue different from deferred revenue and accounts receivable?

In this article, we will answer all these questions and get down to the brass tacks on accrued revenue and how to record it right. 

What is accrued revenue?

Accrued revenue, also known as accrued receivables or accrued income, is an accounting practice to recognize revenue earned but not yet received.

It is the revenue that has been earned by a business by delivering a product or service but is yet to be realized, either because the customer has yet to pay or hasn’t even been invoiced.

When performance obligations (products or services are provided) are completed by a business, it is recognized by the Generally Accepted Accounting Principles (GAAP) as part of accrual accounting. 

Given how accrued revenue represents the money that is owed to a business, it will be recorded as an asset on the balance sheet. In cases where the payment is expected to be billed and received within the current accounting period, accrued revenue may be classified as a current asset on the balance sheet.

On the contrary, if the customer is billed after more than a year, accrued revenue will be labeled as an ‘other asset’ or ‘long-term asset’.

Key takeaways

• Accrued revenue refers to the income earned for providing a product or offering a service for which payment is still due. At times, the payment for accrued revenue may not be expected during the current accounting window.
• This type of revenue is particularly important among service-related businesses. A simple example of accrued revenue is that of a utility provider who supplies electricity to a customer who has not been billed yet for the electricity provided for that month.
• While accrued revenue is considered an asset as this includes income earned but not received, deferred revenue is classified as a liability in the balance sheet as it includes income earned ahead of time before a product is delivered or service is provided.
• Once the customer is billed for the products delivered or services offered, accrued revenue is then converted as an accounts receivable until the customer pays the invoice amount.
• Accrued revenue is added as an adjusting journal entry, listed under current assets on the balance sheet, and entered as earned revenue on the income statement.

Let’s understand this better with an accrued revenue example 

As we’ve seen so far, accrued revenue occurs when there is a difference between the time the goods or services are provided and the payment received for them.

Accrued revenue is prevalent among Software as a Service (SaaS) companies that typically collect a portion of payment after services are delivered; this could be a month or quarter later.

Let’s say a customer, ACME Ltd., signs a 12-month contract with a CRM company at the price of $500. In this case, the company will implement the CRM system and agree to bill the customer at the end of the month. ACME Ltd. will then need to make the payment on the 10th of the following month. From the day the solution is implemented to the day that the payment is made, the CRM company will have $500 in accrued revenue from ACME Ltd.

SaaS companies may also use accrual accounting for any add-on purchases or upgrades made during the subscription period, as well as for one-time charges incurred for migration or exclusive training provided.

In addition to service-related businesses, accrued revenue also occurs for long-term projects where revenue is booked based on milestones met or when a percentage of the project is completed to showcase financial performance to the business’s stakeholders.

For example, an advertising company enters into a long-term contract with a client to deliver campaigns over the next 18 months. In this case, accrual revenue can be recognized on the occurrence of milestones such as concepts finalized, the launch of campaigns, etc.

Accrued revenue vs. deferred revenue

While accrued revenue is recognized before the payment is made, deferred revenue is recognized after the payment is received. Deferred revenue occurs when a client pays a business upfront for goods or services that are yet to be delivered. An ideal example would be when you sign up for a yearly subscription to a magazine and pay the company for a year’s worth of issues even before they ship out the first magazine.

In such instances, considering that all documented revenue is liquid cash is not accurate because there are chances that customers can ask for a refund. This makes it crucial to understand the difference between accrued revenue and deferred revenue.

Key differences include:

• Firstly, deferred revenue is unearned revenue. As such, it is considered a liability on the balance sheet. On the other hand, accrued revenue is classified as an asset and included under accounts receivable once the customer is billed.
• Deferred revenue is recorded over time in the book of accounts and is a recognition of the receipts and payments made after a cash transaction takes place. Whereas the entry for accrued revenue happens all at once for the entire amount, and it leads to the issuance of cash receipts. 

Аccrued revenue vs. accounts receivable

The key difference between accrued revenue and accounts receivable is that accrued revenue is recognized when the revenue has been earned but not received, whereas accounts receivable is recognized when an invoice has been sent for such a transaction.

Accrued revenue and accounts receivable are different forms of customer debt that are added to a company’s income statement as a credit entry and to the balance sheet as a debit entry. Once the customer pays the due amount, the debit entry is replaced with a credit entry on the balance sheet.

How do you record accrued revenue in accounting?

As per the ‘revenue recognition principle’ — a foundational principle of accrual accounting — a business should record revenue in the same accounting period that it is earned. This is regardless of whether the invoice has been generated or cash has been received from the customer.

Similarly, another principle governing accrual accounting is the ‘matching principle’ where expenses are matched to revenue earned. According to this principle, a business needs to record an expense in the same accounting period as when the revenue it helped generate is realized (and not necessarily when the expense has been paid).

​​Coming back to recording accrued revenue in your financial statements — any debit balances concerning accrued revenue need to be recorded on the balance sheet. And any revenue changes will appear in the income statement.

Though the business has yet to receive the payment, an adjusting journal entry is made for accrued revenue as a current asset on the balance sheet. In the income statement, you will need to record it as earned revenue.

‍Why should you make an adjusting journal entry?

An adjusting journal entry is made in recording accrued revenue, as a company’s financial activity needs to be recorded, especially when such an activity has not yet been added to a company’s general ledger during the specified accounting period. Adjusting journal entries ensures that financial statements are accurate and complete for each accounting period.

Once the customer is invoiced, to record the specific amount due from the customer, an accrued revenue reversal entry is made, and the actual revenue earned from the sale is recorded against the account receivable.

The importance of accrued revenue

Accounting for accrued revenue ensures accurate and transparent financial records as it recognizes the occurrence of a transaction even though the customer has not been billed and the payment is due.

Recording accrued revenue helps a business monitor revenue in real-time and capture the overall financial health of the business. Any signs of high accrued revenue imply that the business is not getting timely payments for its services and may end up adding a strain to the cash flow.

Moreover, it allows stakeholders to assess how the sales are contributing to the bottom line and gauge how they will succeed in the long run.

Automate billing and revenue recognition with Zenskar

Accrued revenue serves as a critical element in revenue recognition and is fundamental to maintaining the financial health and operational stability of the business.

Keep your organization’s financial records in check and close books faster with Zenskar’s advanced revenue recognition module.

Zenskar helps SaaS companies and businesses engaging in subscription-based or project-oriented billing, automate revenue accounting end-to-end.

It removes the hassle of working with spreadsheets by empowering accountants to automatically:

• Generate balanced journal entries for accrued revenue, deferred revenue, or accounts receivable based on contract terms and milestones
• Build custom revenue recognition rules
• Create audit-ready accounting reports, balance sheets, and P&L statements adhering to the ASC 606/IFRS 15 five-step model
• Dig deep into accrued revenue and accounts receivable at the customer and contract levels to make informed business decisions

Automate the revenue side of accounting with Zenskar — book a demo today!

Frequently Asked Questions (FAQs)

1. When does accrued revenue occur?

Accrued revenue is revenue recognized but not yet realized. It occurs when there is a delay between the time when the goods or services are delivered and when the payment for them is received. 

2. Is accrued revenue an asset?

Accrued revenue is treated as an asset on the balance sheet. This is because it represents revenue earned by the business. In most cases, the accrued revenue is considered a current asset as the time between earning the revenue and receiving the cash from the customer is less than a year. If the accrued revenue remains collectable for over a year, then it could be considered a long-term asset. 

3. What is the accrued revenue formula?

The formula for calculating accrued revenue is straightforward. You need to add up the amount of revenue due from all customers who have received the products or services in a particular period but have not yet been billed for them.