Understanding Accrued Revenue Before the Adjusting Process Begins

Accrued revenue is a crucial concept to grasp before diving into the adjusting process. It represents the income earned by a business but not yet received in cash.

Accrued revenue is typically recognized when a company has completed the performance obligation, even if the payment has not been received. This can happen in various scenarios, such as when a customer pays in advance or when a company provides services over time.

To understand accrued revenue, let's consider an example. Suppose a company offers a monthly subscription service and has completed the performance obligation for the current month. The company has earned the revenue but has not yet received the payment.

The amount of accrued revenue is usually determined by the terms of the contract or agreement with the customer.

Accrued revenue is the product of accrual accounting and the revenue recognition and matching principles.

The revenue recognition principle requires that revenue transactions be recorded in the same accounting period in which they are earned, rather than when the cash payment for the product or service is received.

Accrued revenue is recognized when the performing party satisfies a performance obligation. For example, revenue is recognized when a sales transaction is made and the customer takes possession of a good, regardless of whether the customer paid cash or credit at that time.

Accrued revenue often appears in the financial statements of businesses in the service industry, because revenue recognition would otherwise be delayed until the work or service was finished.

A construction company will work on one project for many months and needs to recognize a portion of the revenue for the contract in each month as services are rendered.

Accrued revenue is recorded as an adjusting journal entry under current assets on the balance sheet and as earned revenue on the income statement of a company.

This means that on the balance sheet, accrued revenue is reported as a debit balance, while the revenue change appears in the income statement.

Pied Piper IT Services is a great example of this, where they recorded an accrued revenue journal entry to account for reaching the first milestone of a software project.

The contract specified that Pied Piper would be paid $120,000 at the end of the project, but they had to record the accrued revenue as $60,000 at the 6-month mark.

This is done to reflect the revenue earned, even though the payment hasn't been received yet.

The journal entry is reversed when the payment is made, which in this case was for $120,000 after the second milestone was completed.

Debit balances related to accrued revenue are recorded on the balance sheet, while the revenue change appears in the income statement.

Accrued revenue is a current asset that represents sales products shipped or services delivered that have not yet been billed to the customer or paid yet.

Accrued revenue is initially tracked as accounts receivable on the balance sheet. It shifts from earned revenue to an adjusted entry on the asset account when the payment is completed.

Accrued revenue can be found in the service and construction industries, where contracts for services may extend across many accounting periods.

The GAAP revenue recognition principle requires recognizing revenue when performance obligations are completed, and accrued revenue is used in accrual accounting to record revenue at the time of sale, even if payment is not yet received.

Accrued revenue can also be interest income earned but not yet received in cash, commonly referred to as accrued interest income or accrued interest revenue.

Accrued revenue is initially tracked as accounts receivable on the balance sheet, whereas deferred revenue is initially tracked as a liability.

Accrued revenue occurs after work or delivery has been completed, whereas deferred revenue occurs before work or delivery has been completed.

The payment for accrued revenue is made after the work or delivery has been completed, whereas the payment for deferred revenue is made before the work or delivery has been completed.

Accrued revenue shifts from earned revenue to an adjusted entry on the asset account, whereas deferred revenue shifts from a liability to revenue on the income statement.

Accrued revenue offers insight into total revenue earned, whereas deferred revenue offers insight into working capital.

Here's a summary of the key differences between accrued and deferred revenue:

Accrued revenue is commonly found in industries such as service and construction, whereas deferred revenue is commonly found in industries such as insurance.

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.

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.

Accrued revenue is recorded with an adjusting journal entry, with the credit side recording revenue. This follows the revenue recognition principle, which requires that revenue be recorded in the period in which it is earned.

Accrued revenue is commonly used in the service industry, where contracts for services may extend across many accounting periods. This allows businesses to recognize revenue as soon as services are delivered, even if payment is not yet received.

Here are some key characteristics of accrued revenue:

Accrued revenue is recorded when a company has completed a performance obligation, such as delivering a milestone in a project. This is in accordance with the GAAP revenue recognition principle.

Accrued revenue is typically used in service industries where contracts span multiple accounting periods. For example, Pied Piper IT Services agreed to build a flight navigation software for XYZ airlines in 12 months, with a first milestone valued at $60,000.

A company like John A. Crude's construction company will need to document some of this revenue each month to align with ongoing expenditures for a large, long-term project. This is to comply with GAAP standards, particularly the matching principle.

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. This is in contrast to unearned revenue or deferred revenue, which are interchangeable terms for a liability account.

Here are some common scenarios where accrued revenue is recorded:

Accrued revenue is recorded with an adjusting journal entry that recognizes items that would otherwise not appear in the financial statements at the end of the period. This entry debits the asset account for accrued revenue and credits the revenue account.

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.

In the construction industry, a company might accrue revenue for a large project over several months, like John A. Crude's company did with the $2 million deal for a row of townhomes.

Accrued revenue is often recorded with an adjusting journal entry that recognizes items that would otherwise not appear in the financial statements at the end of the period.

A company might accrue 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.

Accrued revenue is used in accrual accounting where revenue is recorded at the time of sale, even if payment is not yet received.

Here are some examples of accrued revenue:

Accrued revenue is the opposite of unearned revenue or deferred revenue, which are interchangeable terms, and is a type of current asset.