What is accrued revenue?

Accrued revenue is sales that have not yet been recorded through the normal customer invoicing process, even though they have met all accounting guidelines for revenue recognition. Accrued revenue is quite common in the services industries, since billings may be delayed until the end of a project. 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 for a business. Also, not using accrued revenue tends to result in much lumpier revenue 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, you need to 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:

	Debit	Credit
Accrued billings	50,000
Consulting revenue		50,000

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:

	Debit	Credit
Consulting revenue	50,000
Accrued billings		50,000

	Debit	Credit
Accounts receivable	100,000
Consulting revenue		100,000

 
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.

Related Topics

Revenue recognition criteria
What is accrued income?
What in unearned revenue?
What is unrecorded revenue?
When can I recognize revenue?