Definition — Accrued revenue
Accrued revenue is income a company has earned by delivering goods or performing services, but for which cash has not yet been received. Under accrual accounting (which records transactions when they occur rather than when cash changes hands), these amounts are shown as an asset on the balance sheet—usually as accounts receivable or a specific accrued‑revenue account—and as revenue on the income statement.
Why it matters
– It aligns revenue with the period in which the underlying work was performed (revenue recognition).
– It ties the costs used to generate that revenue to the same period (matching principle).
– It prevents “lumpy” earnings that would occur if revenue were only recorded when invoices are paid or when long contracts finish.
When to record accrued revenue
Record accrued revenue when both:
1. A performance obligation under a contract has been satisfied (the company has delivered the promised good or service), and
2. The amount is measurable and reasonably collectible.
This approach is required by current revenue‑recognition standards (for example, ASC 606 under U.S. GAAP and IFRS 15 internationally).
How to record it (journal‑entry steps)
1. At the period end, if you’ve earned revenue but not yet billed or collected:
– Debit: Accounts Receivable (or Accrued Revenue) — increases an asset
– Credit: Revenue — records income on the income statement
2. When cash is collected later:
– Debit: Cash — increases an asset
– Credit: Accounts Receivable (or Accrued Revenue) — removes the receivable
Note: For the counterparty (the payer), the same economic event is recorded as an accrued expense (a liability) until payment is made.
Short checklist for recording accrued revenue
– Confirm the performance obligation is satisfied (goods delivered or service rendered).
– Determine the amount earned and assess collectability.
– Make an adjusting journal entry at period end: debit receivable, credit revenue.
– Reverse or clear the receivable when cash arrives: debit cash, credit receivable.
– Disclose accounting policies and any significant judgments under applicable standards (ASC 606 / IFRS 15).
Worked numeric example
Situation: A consulting firm completes services worth $9,000 on March 28 but does not bill the client until April 10 and receives payment April 25.
March 31 adjusting entry (to recognize March revenue):
– Debit Accounts Receivable (Accrued Revenue) 9,000
– Credit Consulting Revenue 9,000
Effect: March income statement reports $9,000 revenue; balance sheet shows $9,000 receivable.
April 25 when cash collected:
– Debit Cash 9,000
– Credit Accounts Receivable 9,000
Effect: Cash increases; the receivable is removed. No additional revenue is recorded in April for this amount because it was already recognized in March.
Common examples of accrued revenue
– Long‑term contracts (construction, engineering) where work spans multiple reporting periods.
– Service businesses that finish work before billing (consulting, legal, auditing).
– Landlords who recognize earned rent before the tenant’s payment date.
– Defense or aerospace suppliers that deliver parts incrementally but bill periodically.
Practical considerations and risks
– Be cautious about collectability. If payment is doubtful, recognize allowance for doubtful accounts or delay revenue recognition depending on the facts and standards.
– Ensure consistent application of revenue‑recognition policies and adequate disclosure of significant estimates.
– Coordinate with the counterparty’s accounting to avoid mismatched timing (one side records accrued revenue and the other records an accrued expense/liability).
Selected authoritative references
– Investopedia — “Accrued Revenue”
https://www.investopedia.com/terms/a/accrued-revenue.asp
– IFRS Foundation — IFRS 15 “Revenue from Contracts with Customers” (overview)
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-contracts-with-customers/
– Financial Accounting Standards Board (FASB) — Revenue Recognition / Topic 606 information
https://www.fasb.org/page/revenue-recognition
Educational disclaimer
This explainer is for educational purposes only. It describes accounting concepts and common practice; it is not personalized financial, tax, or audit advice. For specific situations, consult a licensed accountant or appropriate professional.