Definition
Accrued revenue refers to income that a company has earned by delivering a product or providing a service, but has not yet collected payment for. It represents business earnings but is not counted as actual cash revenue until payment is received. Accrued revenue is reported on a company’s balance sheet as a current asset.
Key Takeaways
- Accrued Revenue is an accounting concept that represents income which has been earned, but not yet received. This is usually due to the nature of billing cycles and the timing of revenue recognition.
- It is recorded on the balance sheet as a current asset, showing the economic benefit expected to be received in the future. It is essential in financial reports as it gives an accurate picture of a company’s financial situation.
- At the period end when payment is received, the amount of accrued revenue is moved from the asset to the revenue on the income statement, reflecting the true revenue generated during the period.
Importance
Accrued revenue is a crucial concept in accounting because it aids in providing a more accurate picture of a company’s financial health.
It refers to the earned revenues by a company for the services or goods provided or used that have not yet been paid by customers or reported in the General Ledger.
Accounting these revenues allows a company to reflect its true earnings within a specific period, keeping its financial statements up-to-date.
Accrued revenue thus plays a significant role in assessing a firm’s performance, profit margin and in ensuring financial transparency, especially within the accrual accounting framework.
Explanation
Accrued revenue, a critical concept in accounting, plays a significant role in providing an accurate picture of a company’s financial health considering its earnings and obligations. It allows companies to reflect earned revenue before cash exchanges hands.
By doing so, accrued revenue aids in aligning earned revenue with the expenses incurred in earning that revenue, thus giving a more comprehensive view of a company’s profitability during a specified accounting period. Furthermore, accrued revenue is crucial to maintain the fundamental accounting principle of matching, where revenues and corresponding expenses are recorded in the same accounting period.
This leads to the creation of a more balanced and uniform financial statement, providing a more realistic view of the company’s financial performance. Without such a mechanism, a company’s particular period could look highly profitable until the bills come due in another period, throwing off the overall financial perspective.
Examples of Accrued Revenue
Rental Income: A real estate company owns a building that it rents out to tenants. In this case, the accrued revenue will be the rental income that has been earned, but the company has not yet received it because the rental period has not been completed yet.
Interest Income: A bank loans out money to individuals or businesses. Even if the interest payments are to be received at the end of the loan period, the bank is accruing interest income over the period of the loan as per the agreement.
Service Providers: A law firm that bills its clients on an hourly basis is another example. Suppose a firm works for a client in December but doesn’t invoice the client until January. The firm still recognizes revenue for those services in December, because that’s when the service was provided. The invoice in January will be the actual cash inflow, but the accrued revenue was recognized in the previous accounting period.
FAQs for Accrued Revenue
What is Accrued Revenue?
Accrued Revenue refers to revenue that has been recognized by a company for goods or services, but no payment has been received. Despite issuing an invoice, the revenue will come at a later date.
Is Accrued Revenue an Asset?
Yes, accrued revenue is considered to be a current asset because it provides an economic benefit that will be realized within one year.
How does Accrued Revenue appear on the Balance Sheet?
Accrued revenues appear as a line item in the asset section on a company’s balance sheet, under accounts receivable. It shows the money a company expects to receive.
How does Accrued Revenue affect the Income Statement?
When accrued revenue is initially recorded, the amount of income recognized on the company’s income statement is increased by the same amount and thus balances the books.
What is an example of Accrued Revenue?
An example of Accrued Revenue could be a company that has delivered a product or service, sent an invoice but hasn’t received payment. The value of that product or service is treated as Accrued Revenue.
Related Entrepreneurship Terms
- Accrual Accounting
- Deferred Revenue
- Accounts Receivable
- Revenue Recognition Principle
- Balance Sheet
Sources for More Information
- Investopedia: A comprehensive finance and investing education website which includes articles on accrued revenue.
- Corporate Finance Institute: Provides online financial analyst training and education, including information on accrued revenue.
- Accounting Tools: A website dedicated to explaining different accounting concepts and methods, including accrued revenue.
- MBASkool: A business and management knowledge base including finance concepts such as accrued revenue.
