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What Are Accrued Revenue Journal Entries?
Accrued revenue journal entries refer to the figures derived and entered by adjusting entries at the end of an accounting period to record sales transactions that occurred during that accounting period but were not yet billed. It is classified as current assets on the balance sheet, whereas on the income statement, it is classified as revenue.
This accrued revenue, in short, is the revenue generated from products that have been delivered to customers, but the payment f which is still pending. The journal entries for such revenues are made immediately as soon as the products are shipped from the business’ end and the latter does not wait for the time customers pay for it.
Accrued Revenue Journal Entries Explained
Accrued revenue journal entries are records put in for product deliveries that are done to customers, but the payment if which is scheduled at a later stage. Though it might raise questions as to how the journal entry for such incomplete transactions can be made, but then entering these revenues in the financial statements of the company help estimate the current progress and position of a firm.
Though the accrued revenue entries have no cash payments to show from the end of the customers, their deliveries are done, and hence the payment is guaranteed to be received. Moreover, businesses do not make this provision available to all their customers. This is the option that is offered only to those having long-term connection with the organizations or firms. Hence, the long-term connection also adds to the reliability of receiving payment at the scheduled future date.
While accrued revenue becomes a current asset entry on the balance sheet, it is entered as earned revenue in the income statement. This is because it is always an incoming money no matter received or not. On the contrary, when the payment is actually made, the accrued revenue journal entry is made to the asset account.
These accrued revenue figures enter the financial statements of a business as soon as the customers receives the delivery. The firms do not wait for the customers payments in exchange for those deliveries, as they are scheduled at a later date. The accounting period, therefore, does not undergo any delay. Another reason that makes businesses record these revenues even before the real cash is received is the delivered products. The firms know that when the delivery is made, the payment will surely be received. There are rare instances of default as in most cases, the firm knows and trusts the customers for such accrued revenue generation.
Examples
Let us consider the following instances to understand how accrued revenue generate entries are prepared:
Example #1
XYZ Company is in the contracting business and has operations in the middle east and east Africa. The company entered into a contract with JR Associates to build a hotel in Arab. The agreement is that the JR Associates will pay $50,000 each to XYZ after each milestone. What is the journal entry for this if the total contract value is $100,000?
The first Journal entry will be -
After the second milestone, two entries will be recorded, one reversal of the initial accrual and another for billing the client.
Example #2
On 31 December 2019, Jeffery, an Investment banking firm operating in the United States of America, rendered services worth $500 to their client, which is in the BPO business. The bank helped facilitate a transaction with them. It was agreed between both parties that the client would pay for the investment banks' service after Jan 2019, and the transaction was not recorded in the books of accounts. Hence, in this case, the following journal entry needs to be passed into the books of accounts.
The first Journal entry will be -
Example #3
ABC limited receives an interest income of $1,000 on a bank deposit, which they have deposited in the Abu Dhabi National Bank for December 2010 and on 3rd January 2011. ABC Limited is preparing the books of accounts for the year ending 31st December 2010; what accrued entry should allow the business to pass.
The business should record the journal entry in the year itself because it is about the accounting year ending 31 December 2010. In the books of accounts, the following entry will be passed.
The first Journal entry will be -
And on the 3rd January, when the interest is received, the following entry will be passed in the books of accounts.
Example #4
Teleperformance Company, a French-based company, is in the consulting business and has operations in the Asian and the Asia Pacific Market. The company entered into a contract with Intelenet Global Services to operate a call center in India. The agreement is that the company will pay $100,000 each to Teleperformance after each milestone. What is the journal entry for this if the total contract value is $200,000?
The first Journal entry will be -
After the second milestone, two entries will be recorded, one reversal of the initial accrual and another for billing the client.
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