What Is Accrued Revenue?
Let me explain accrued revenue directly: it's the revenue you've earned by delivering a good or service, but the cash hasn't come in yet. You record it as a receivable on your balance sheet to show what customers owe you for what they've already received. This contrasts with realized revenue, where payment is immediate, and it's similar to how you handle accrued expenses on the other side.
Key Takeaways
- Accrued revenue fits into accrual accounting, where you log revenue when it's earned, not when paid.
- It follows the revenue recognition principle, ensuring revenue hits the books in the period it's earned.
- You use adjusting journal entries to record it, so it shows up correctly in your end-of-period financial statements.
- This approach is standard in service industries with contracts spanning multiple periods.
Understanding Accrued Revenue
You need to grasp that accrued revenue stems from accrual accounting, tied to the revenue recognition and matching principles. Recognize revenue in the period it's earned, not when cash arrives—that's the rule. The matching principle links that revenue to the expenses that generated it. Under GAAP, you recognize it when you've met your performance obligation, like when a customer gets the good, regardless of payment method.
This is crucial in service businesses, where work might stretch over months. Without accruing revenue, your financials would look erratic, with revenue lumps that don't reflect reality. Take a construction firm: you should accrue revenue monthly as work progresses, not wait until the project's end. Remember, standards like ASC 606 standardize this for better comparability across companies.
Recording Accrued Revenue
When you record accrued revenue, you make an adjusting journal entry. Debit an asset account for the accrued amount, and it'll reverse when payment comes in, crediting revenue. This ensures items missing from the general ledger at period-end get included.
If you're the one accruing revenue, the other party records it as an accrued expense—a liability. On your income statement, credit revenue and debit accounts receivable on the balance sheet. When the customer pays, debit cash and credit the accrued revenue or receivable account. It's straightforward but essential for accurate books.
Examples of Accrued Revenue
Consider companies in long-term projects, like construction or engineering. They accrue revenue as portions of the work are completed, even if billing happens later. Aerospace firms might do this with government contracts, accruing as hardware is delivered but billing annually.
Landlords often accrue revenue too—if rent is due at the month's start but paid at the end, you record it when earned. These examples show how accruing keeps your financial picture steady and true.
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