Accrued Revenue Explained
Accounting for accrued revenue recognizes revenue or income in the right accounting period in the financial statements, according to GAAP. This article gives a definition and examples of accrued revenue, compares it to unearned revenue (deferred revenue), and explains making the journal entry for earned accrued revenue as an asset and revenue before receiving cash from customers.
What is Accrued Revenue?
Accrued revenue is an asset account that could be accounts receivable to record revenue that’s earned before cash is received, under the generally accepted accounting principles (GAAP) accrual basis of accounting. GAAP accounting standards, including ASC 606 for revenue recognition in corporate finance, are based on the revenue recognition principle that defines when revenue is earned.
Accrued income is a kind of accrued revenue that applies to interest income and dividend income.
Accrued revenue accounting doesn’t reflect cash flow, as does the cash method of accounting.
In cash transactions for earned revenue, accrual accounting for revenue isn’t necessary, assuming the transaction is recorded at the time of the sale or service. In this case, the accrual accounting method and cash-basis accounting produce the same results for the transaction in the company records for accounting.
What is the Accrual Accounting Method?
The accrual basis of accounting is broader than accrued revenue. Accrual accounting covers both accrued revenue and accrued expenses. Accrual accounting requires recording expenses in the same accounting period as related revenue, which is based on the GAAP matching principle.
Is Unearned Revenue Accrued Revenue?
No. Unearned revenue isn’t accrued revenue. Unearned revenue is another name for deferred revenue. To understand accrued revenue vs deferred revenue (unearned revenue), think of them as opposites. For unearned revenue, cash is received in advance of the product delivery or time of use, or service performance. Cash receipts occur after accrued revenue is earned.
Unearned revenue is a liability account. Accrued revenue is an asset account on the balance sheet.
An unearned revenue example is a SaaS software subscription plan paid on an annual basis, but earned over time and recognized monthly for financial statement purposes. Another example of unearned or deferred revenue is an advance deposit from a customer on a product that will be manufactured and delivered in the future. For example, a business customer places a reservation deposit on a Tesla automobile, with the expected delivery to occur several months later.
Why Accrued Revenue is an Asset
Accrued revenue is usually recorded as a current asset because the time between earning the revenue and receiving the cash is generally less than one year or the company’s operating cycle. If it takes more than a year to receive the cash that’s still considered collectible, then accrued revenue could be a long-term asset instead.
Accrued revenue in the balance sheet is one side of the double-entry bookkeeping journal entry. The other side of the balancing entry is the revenue account (or accounts) flowing to the income statement.
Accrued Revenue vs Accounts Receivable
What’s the difference between an accrued revenue asset and accounts receivable?
For earned sales or service revenue on credit terms, record the accrued revenue as a current asset in the accounts receivable account. When interest or dividend income is earned in a month, but the cash isn’t received until the next month, then make a journal entry to debit an accrued revenue account (an accrued revenue asset) in current assets.
The credit for sales and services is to a revenue account in the general ledger chart of accounts. In the case of interest income, the credit is to interest income account in the general ledger chart of accounts. For dividends, the credit is to the dividend income account.
What is an Accrued Revenue Example?
The first example relates to product sales, where accrued revenue is recorded as a debit to accounts receivable.
On September 1st, a small business invoices a customer for a total of $25,500 for products shipped on August 31st, on account credit with 2/10 net 30 credit terms. On October 3rd, when closing the books for August, the accountant accrues this earned revenue as August sales revenue on the income statement and accrued revenue, recorded as accounts receivable on the balance sheet as a current asset.
The second example is accrued revenue for interest income on a loan earned in August for which cash has not yet been received from the payor, but is due in September.
What is the Adjusting Entry for Accrued Revenue Accounting?
For the product sales accrued revenue example, the accrued revenue journal entry before customer cash is received is:
When customer cash is received, make the following journal entry, which reverses the accrued revenue coded to accounts receivable.
For the interest income accrued revenue example, make the following journal entry before cash is received:
|Accrued revenue or accrued interest income||500|
When cash is received from the interest payor is received, make the following journal entry, which reverses the accrued revenue or accrued interest income amount:
|Accrued revenue or accrued interest income||500|
Accrued Revenue Construction Contract Accounting
Is accrued revenue accounting different for construction project contract accounting?
Commercial construction contracts are often completed over more than a year, depending on the type of construction.
Construction is accounted for on a percentage of completion basis, with revenue accrued and earned over time as performance obligations are completed, costs are incurred, or transfer of control happens. In the GAAP accounting standards codification, ASC 606 governs revenue recognition for construction contracts.
Accrued Revenue Recognition Summary
The accrued revenue meaning in accounting is the recorded revenue or income that has been earned before the cash payment from the customer or payor is received, and the related asset account on the balance sheet. Accrued revenue is recorded as of each accounting month-end, using a journal entry to recognize revenue in the right accounting period.
Examples of accrued revenues in general and in the construction industry are presented. We compared accrued revenue to accounts receivable. We used the GAAP-required accrual accounting method to record the revenue accrual using double-entry bookkeeping in an adjusting journal entry.