What Is Accrued Revenue?
Accrued Revenue is Revenue in your account at the time of sale, but the seller has not yet made the payment. However, it is a part of your Balance Sheet because it relates to the receipts from payroll and other activities your company engages in.
Understanding Accrued Revenue
Accrued revenue is a hybrid accounting method used by online sellers who recognize a sale from a previous customer but do not take the money from that customer out of their bank account or pay the vendor until the vendor has received it. It is a taxable event for the vendor but is recorded at the vendor’s sale in revenue. The revenue accrues to both buyers and vendors and is treated as income by each individual as each sales transaction is treated as a separate purchase.
The process of recognizing and accounting for accrued revenue has several steps. Accrued revenue is recognized when the cash payment or credit (or combination) is satisfied. Generally accepted accounting principles (GAAP) are used to determine whether an asset has been sold to satisfy revenue obligations; however, there are special rules that apply when determining whether an asset has been sold for proceeds that are separate from cash payments received, interest received on debt held by the seller at the time of sale, or taxes payable.
The term “accrued revenue” often appears in the financial statements of businesses in the service industry. Revenue recognition in the service industry can be delayed for long periods—in contrast, in manufacturing, invoices are issued when products are shipped. Accrued revenue allows you to report revenues and profit when they are earned, not when the payment has been received. When you consider all costs, it also provides a more accurate picture of where a business stands.
Recording Accrued Revenue
Accrued revenue is reported in the financial statements when an account has been created for a specific item of revenue that covers set-up and transaction costs that are not directly related to the sale or incurred as a result of the sale. When an accrual accounting system records an accrued asset, the other company will record a liability – this process is often referred to as recording an accrued expense.
Revenue is recognized on the income statement when it is realized or realizable. When you record revenue, you have to charge the same amount to your current liabilities in order to keep your balance sheet balanced.A customer making the payment would be recorded as revenue, and the corresponding recognized amount would be included in the revenue account. An accountant makes a journal entry in which cash received by the customer is debited to the cash account on the balance sheet. The same amount is credited to the accrued revenue account, reducing that account.
Examples of Accrued Revenue
- Accrued revenue is an interest charge that accrues on the purchases of goods that have not yet been paid for. This happens even if you have negotiated a price with the seller and received cash for the item. For example, if you buy something at a good price and then find out later that it is not as good as you thought it would be, then you would owe money to the seller—even if you had negotiated an even better price. This happens because businesses have a financial incentive to oversell, so if they oversell a good, they get paid more money from the moment they sell it than if they sold it at a lower price.
- Some companies use accrued revenue as an incentive to encourage customers to buy something before the due date. For example, if a company has a 15% discount on a product for the first 30 days, they would owe customers 15% less at the end of each month even if they don’t buy the product until the due date.
Is Unearned Revenue Accrued Revenue?
No. Unearned revenue is another term for deferred revenue. Deferred revenue is normally referred to as unearned revenue from upfront payments for a product or service. For example, if you purchase a product and pay $1000 today even though the completion of the project hasn’t occurred yet, or if you purchase an annual subscription for services and pay $1000 at the beginning of the year without taking advantage of any services during that period, your payment is considered unearned revenue.
Why is Accrued Revenue an Asset?
Accrued revenue is a revenue item that arises when revenue is recognized before it’s received in cash. This could be because a time lag exists between the sale and the cash receipt, or a service has been provided but not yet billed. The period from sale to receipt of cash is generally less than one year or the company’s operating cycle. If it takes more than a year to receive the cash, then accrued revenue could be a long-term asset instead.
To maintain accounting transparency, revenue account balances are offset by an equal amount in the accrued revenue account on the balance sheet.
What’s the Difference Between an Accrued Revenue Asset and Accounts Receivable?
Post the earned revenue as an asset in the accounts receivable account to record sales on credit terms. Record this as an asset in accrued revenue when interest or dividend income is earned in a month but not received until the next month.
Accrued revenue assets and accounts payable are liability accounts in the general ledger chart of accounts. For accrued expenses, the credit is to an expense account in the general ledger chart of accounts. Interest income is credited to an interest income account, dividends are credited to a dividend income account, and other secondary incomes are credited elsewhere.