Accrued revenue refers to revenue that has been earned in a period but the cash is not yet received for that period and the examples of which include salary earned but received in next month, interest earned but not received for that period, bills or accounts receivable not yet received by the company.
Examples of Accrued Revenue
The following accrued revenue examples provide an outline of the most common accruals. Accrued revenue means the revenue which is yet to be earned by the company supplying goods or services because it is yet to be billed to their customer. Though the services/goods have been provided/completed the bill has not been raised on the customer. So, the revenue which has been recognized by the seller but not yet billed to their customers is accrued revenue.
Below are the examples of Accrued Revenue Journal entries with the explanation.
Most Common Examples of Accrued Revenue
Example #1
- Let’s assume, M/s ABC (company) has made an agreement with M/s K (Individual) to provide 12 plants and machinery in a year. Company ABC identified to consider each plant and machinery as a milestone of the project and accordingly, they will recognize the revenue at the completion of each milestone.
- Now, in this case, Company ABC can recognize revenue on completion of each plant and machinery as accrued revenue whether the same has been billed monthly or once a year. The company ABC can record the same as revenue in the books of account and simultaneously M/s K can record accrued expenses in their books.
Example #2
- Suppose, company X is a consultancy firm that provides consultancy services to its clients. They charge their clients on a per hour basis i.e. $ 10 p/hr. In the month of April 2019, they had given the consultancy for around 200 hrs, however, the work has not yet completed and company X won’t raise invoice until June 2019 in which Company X is expecting to raise the final bill of around $ 10,000.
- Company X records accrued revenue in the books amounting to Rs. $ 2000 ($10 x $ 200) as their income for the month of January 2019 even though the same has not been billed to their client or the payment has been received for the work.
- Now, when the company X sends the invoice in the month of June 2019, accrued revenue of $ 10000 shall be converted into accounts receivables and when the client actually pays the amount it will get converted into cash.
Example #3
- Suppose, Mr. A owns a shop who provides his shop to the shopkeeper on a monthly rent of $ 500. Shopkeeper pays the monthly rent in the first week of next month. This means the landlord Mr. A does not actually receive the money in respect of monthly rentals until after the services have been given to the shopkeeper.
- At the end of the year, Mr. A income statement would show only 11 payments from the shopkeeper since the last month’s rent shall be paid in the next month’s first week. But Mr. A already provided the rental services to the shopkeeper in the last month of the year so he should show this earned income as accrued income.
- Accordingly, Mr. A records such transaction in the journal entry by debiting the accrued (revenue) account and crediting the revenue account in the books of account.
Example #4
- Another type of accrued revenue is known as Accrued interest revenue.
- In this case, suppose if a company provides loan to the other company, they will earn interest income on the loan. A company can accrue interest income every month even if the bill of repayments of the loan was raised semi-annually or annually.
- Ex-Company X gives loan to Company Y says $4000 on which Company X will receive an interest payment of $ 600 every year from Company Y. Even though Company X receives interest on year-end, the same has to be recorded in the books of accounts on a monthly basis. The company would debit accrued billing and credit interest revenue once a month on a proportionate basis i.e. $ 50 per month.
- Upon sending the final invoice to Company Y, Company X shall debit accounts receivables and credit accrued billing of $ 4000.
Example #5
- Now, in the last example, we should understand the accrued revenue on the basis of journal entries to be passed in the books of accounts.
- Let’s extend example no 2 cited above, wherein company X provides consultancy services to their clients. Since the above example allows company X to do the billing in the month of June 2019 i.e. at the end of the project amounting to $ 10,000. Company X shall records the following journal entries into their books of accounts:-
In the month of June 2019, when Company X raises the complete invoice to their client, the following entries shall be passed:-
Conclusion
- In view of the above, every company can maintain its books of accounts on a mercantile basis or cash basis but it cannot be changed on a year to year basis. From a company perspective, it is very tough to recognize that revenue that has not been earned and companies are accordingly liable to pay taxes on the same.
- Generally, every company records its books of account on a mercantile basis because the cash basis of accounting is very hard to maintain as it will not give a clear picture of the company’s performance. However, on the accrual basis, revenues are always associated with their corresponding expenses which give a true and fair picture of the operations in the given period.
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