We give an accrued revenue definition to explain the meaning and examples of accrued revenue. Accrued revenue is compared to unearned revenue (deferred revenue) and accounts receivable. The journal entry is made for accrued revenue as an asset and income statement revenue before billing and receiving cash from customers for proper revenue recognition in accounting.
What Is Accrued Revenue?
Accrued revenue is when a business has earned revenue by providing a good or service to a customer, but for which that customer has yet to pay. Accrued revenue is recognized as earned revenue in the receivables balance sheet, despite the business not receiving payment yet.
- Accrued revenue is a current asset recorded for sales products shipped or services delivered that have not yet been billed to the customer or paid yet.
- The credit side of the adjusting journal entry is to record revenue. The GAAP revenue recognition principle in financial accounting requires recognizing revenue when performance obligations are completed.
- An accrued revenue reversal entry can be made when the customer is invoiced to record the revenue for product sales or services with the accounts receivable account instead of accrued revenue.
- Accrued revenue is the opposite of unearned revenue or deferred revenue, which are interchangeable terms. For unearned revenue or deferred revenue, a cash payment like a deposit or required contract upfront payment is received before the product or services are shipped or delivered to the customer. Deferred revenue is a liability account.
- Interest income earned but not yet received in cash is a type of accrued revenue current asset called accrued interest income (or accrued interest revenue).
Accrued Revenue Explained
Accounting for accrued revenue recognizes revenue or income in the correct accounting period in the financial statements, according to GAAP, and records a current asset.
Accrued revenue for product sales and services recognizes revenue and a current asset before the customer is billed and cash is collected for the revenue.
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.
Examples of Accrued Revenue
The first example relates to product sales, where accrued revenue is recorded as a debit, and the credit side of the entry is sales revenue.
On August 31st, a small business ships $25,500 in products to a customer. On September 1st, the business invoices the customer $25,500 for these products shipped on August 31st on account, extending credit with 2/10 net 30 credit terms.
On September 3rd, when closing the books for August, the accountant accrues this earned revenue not yet billed at month-end as the current asset, accrued revenue on the balance sheet, and credits August sales revenue on the income statement.
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.
How to Record Accrued Revenue
Recording accrued revenue requires adjusting journal entries with double-entry bookkeeping and reversing the accrued revenue journal entry when product shipments or services are billed as accounts receivable. When interest income is earned but not yet received in cash, the current asset account titled accrued interest income is used to record this type of accrued revenue.
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Recording Adjustments for Accrued Revenue
For the product sales accrued revenue example, the accrued revenue journal entry for unbilled sales or services, with customer cash not yet received is:
When the customer is billed, the following adjusting entry is made to reverse the original entry to record accrued revenues.
The standard procedure for customer invoice recording will record accounts receivable and sales revenue through a journal entry for accounts receivable subsidiary ledger activity.
When customer cash is received after the customer pays their accounts payable balance, make the following journal entry to increase cash and reduce the accounts receivable balance.
Making Entries for Accrued Interest in Accounting
For an interest income accrued revenue example, make the following journal entry before cash is received to record the accrued revenue as accrued interest income, a current asset, and interest income as other income on the income statement:
|Accrued interest income||500|
When cash is received from the interest payor, make the following journal entry, which reverses the accrued interest income amount:
|Accrued interest income||500|
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.
An example of unearned revenue (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 cash deposit on a Tesla automobile, expecting delivery to occur several months later.
What’s the Difference Between Deferred and Accrued Revenue?
The difference in accrued revenue vs. deferred revenue primarily relates to whether the cash receipt was received after or before the product was shipped to the customer or the services were performed.
For deferred revenue (unearned revenue), cash is received in advance of the product delivery or time of use, or service performance. Deferred revenue may relate to long-term projects. For accrued revenue, customer invoicing and cash receipts occur after accrued revenue and sales revenue is recognized for shipping goods to the customer or performing services.
Unearned revenue is a liability account on the balance sheet. Accrued revenue is an asset account.
What’s the Difference Between Accrued Revenue vs. Accounts Receivable?
Accrued revenue vs accounts receivable is different because customer invoicing hasn’t occurred yet when accrued revenue is recorded. For both open accounts receivable and accrued revenue, cash hasn’t been received yet from the customer.
What is the Accrual Accounting Method?
What Is Accrual Accounting in Oracle Apps?
Oracle Applications or Oracle Apps is the business applications software in the Oracle ERP system. Oracle Apps works with financial applications, including the Financials Accounting Hub (FAH), to drill down to the detailed accrual journal entry level. Accrual accounting is required by U.S.-based GAAP (generally accepted accounting principles) instead of cash accounting.
What’s the Difference Between an Accrued Revenue Asset and Accounts Receivable?
The difference between an accrued revenue asset and accounts receivable is whether billing to the customer has occurred yet.
If the customer has not yet been billed, record the accrued revenue as a current asset on the balance sheet, with a credit to revenue on the income statement. After customer billing for earned sales or service revenue on credit terms, reverse any entry to an accrued revenue asset account and record accounts receivable instead.
When interest or dividend income is earned in a month, but the cash isn’t received until the next month, make a journal entry to debit an accrued revenue account like accrued interest income (an accrued revenue asset) in current assets and record interest income as a credit to other income.
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.
Why is Accrued Revenue an Asset?
Accrued revenue is usually recorded as a current asset because the time between earning the revenue and receiving the cash after customer billing is generally less than one year or the company’s operating cycle. If it takes more than a year to receive the money 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.