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ACCRUED REVENUE: Recognition, Adjusting Entries, Financial Statement Impact

Accrued revenue refers to income earned but not yet billed or received by the end of a reporting period. It ensures that revenue is recognized in the correct accounting period, even when the cash or invoice timing is delayed.

1. What Is Accrued Revenue?

Accrued revenue is earned income from goods delivered or services performed that have not yet been invoiced or collected.

This concept is central to accrual accounting, which requires revenue to be recorded when earned, not when cash is received.


Common examples include:

  • Consulting services rendered but not yet billed

  • Interest earned on investments but not yet received

  • Long-term contracts with unbilled milestones

  • Subscription services partially completed


2. Initial Recognition and Adjusting Entry

When revenue is earned but not yet invoiced or paid, a receivable must be recorded.


General adjusting entry at period-end:

  • debit Accrued Revenue (Asset or Accounts Receivable)

  • credit Revenue (Income)


Example

On December 31, a consultant completes $6,000 of work for a client, invoice to be sent in January:

  • debit Accrued Revenue .................................. 6,000

  • credit Consulting Revenue .............................. 6,000

This aligns the earned revenue with the correct reporting period.


3. Reversal or Invoicing in the Next Period

When the invoice is eventually sent or cash is received:

  • If using accrued revenue (as an asset):

    • debit Accounts Receivable

    • credit Accrued Revenue

  • Then, when cash is collected:

    • debit Cash

    • credit Accounts Receivable

This ensures that no double revenue is recognized.


4. Matching Principle and Revenue Recognition

Accrued revenue ensures compliance with the revenue recognition principle, which states:

  • Revenue is recorded when performance obligations are satisfied, not when cash is received.

This approach improves the accuracy of net income and financial position at period-end.


5. Financial Statement Impact

  • Balance Sheet: Accrued revenue appears under current assets (sometimes labeled “Unbilled Revenue” or “Contract Assets”).

  • Income Statement: Recognized as earned revenue in the period the service or delivery occurred.

  • Cash Flow Statement: Impacts operating activities only when cash is collected—not when the revenue is accrued.


6. Accrued Revenue vs Deferred Revenue

Aspect

Accrued Revenue

Deferred (Unearned) Revenue

Timing

Earned, not yet billed or received

Received, but not yet earned

Balance Sheet

Current asset

Current liability

Recognition

Revenue increases

Revenue deferred


7. Examples by Industry

Industry

Accrued Revenue Example

Consulting

Hours worked in December, billed in January

Finance

Interest earned on a bond, payable next quarter

Construction

Milestone completed in year-end, invoiced after audit approval

SaaS / Subscriptions

Service delivered but not yet billed under monthly billing cycle


8. Risks and Considerations

Accrued revenue requires judgment and accurate tracking to avoid:

  • Overstating revenue or receivables

  • Recording unearned income

  • Audit reclassifications or reversals

Companies must assess:

  • Evidence of performance

  • Collectibility likelihood

  • Consistent application of revenue policies (ASC 606 / IFRS 15)


Key take-aways

  • Accrued revenue ensures income is recognized when earned, not when billed.

  • It appears as an asset and supports proper matching of revenue and expenses.

  • Judicious recognition is critical to avoid overstating earnings.

  • Accurate accruals reflect financial performance even when billing or cash is delayed.


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