Accrued revenue is a sale that has been recognized by the seller, but which has not yet been billed to the customer. This concept is used in businesses where revenue recognition would otherwise be unreasonably delayed.
Accrued revenue is quite common in the services industries, since billings may be delayed for several months, until the end of a project or on designated milestone billing dates. Accrued revenue is much less common in manufacturing businesses, since invoices are usually issued as soon as products are shipped.
The concept of accrued revenue is needed in order to properly match revenues with expenses. The absence of accrued revenue would tend to show excessively low initial revenue levels and low profits for a business, which does not properly indicate the true value of the organization.
Also, not using accrued revenue tends to result in much lumpier revenue and profit recognition, since revenues would only be recorded at the longer intervals when invoices are issued.
In order to record these sales in an accounting period, create a journal entry to record them as accrued revenue.
For example, ABC International has a consulting project with a large client, under which the consulting agreement clearly delineates two milestones, after each of which the client owes $50,000 to ABC. Since the agreement only allows for billing at the end of the project for $100,000, ABC must create the following journal entry to record reaching the first milestone:
At the end of the next month, ABC completes the second milestone and bills the client for $100,000. It records the following entry to reverse the initial accrual, and then records the second entry to record the $100,000 invoice:
The debit balance in the accrued billings account appears in the balance sheet, while the monthly change in the consulting revenue account appears in the income statement.
Accrued revenue is not recorded in cash basis accounting, since revenue is only recorded when cash is received from customers.
The reverse of accrued revenue (known as deferred revenue) can also arise, where customers pay in advance, but the seller has not yet provided services or shipped goods. In this case, the seller initially records the received payment as a liability, and later converts the entry into a sales when the transaction is completed.
Accrued revenue is also known as accrued sales.