Accrued Revenue Meaning
Accrued Revenues is the revenue that the company has earned in the normal course of business after selling the good or after providing services to the third party, however, the payment for which has been not been received. It is shown as an asset in the balance sheet of the company.
Redfin Corporation reported such accrued revenue of $12.09 million in the March’18 Quarter and $13.3 million in the December ’17 quarter.
Understanding Accrued Revenue
Accrued revenue is a part of the sale which has been recognized by the seller, however not yet billed to the customer. This concept is mostly used in businesses where revenue recognition is delayed for an unreasonable longer period.
It is a very common practice in the industries where billings to customers are delayed for several months till a designated millstone is reached (in terms of percentage completion) or till the end of the project. It is much less commonly used in manufacturing businesses where invoices are usually issued as soon as products are shipped.
Let us consider below case study.
XYZ International is having a consulting project with one of its large clients, under which the agreement delineates two milestones for billing, after each of which the client owes $60,000 to XYZ. As the agreement is such that it only allows for billing at the end of the project for $120,000. XYZ must create below is the accrued revenue journal entryAccrued Revenue Journal EntryAccrued Revenue is revenue that the seller recognizes but does not bill to the customer. As an asset, accrued income is debited at the time of recording. At the time realization of this income, accrued income account is credited to diminish the asset value.read more to record reaching the first milestone:
| Debit | Credit | |
|---|---|---|
| Accrued Billing | 60,000 | |
| Consulting Revenue | 60,000 |
At the end of another two months, XYZ completes the second milestone and bills the client for $120,000. XYZ records the following is the journal entry to reverseEntry To ReverseReversing entries refer to those journal entries passed in the current accounting period to offset the entries for outstanding expenses and accrued income recorded in the immediately preceding accounting period.read more the initial accrual, and after that records the second entry for the $120,000 invoice:
| Debit | Credit | |
|---|---|---|
| Consulting Revenue | 60,000 | |
| Accrued Billing | 60,000 |
| Debit | Credit | |
|---|---|---|
| Account Receivable | 120,000 | |
| Consulting Revenue | 120,000 |
Debit balances related to accrued billings account are recorded on the balance sheet, while the consulting revenue change account appears in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.
The reverse of deferred revenue, i.e., accrued service revenue, can also arise when customers pay in advance, but the seller has not provided services or shipped goods to date. In that case, the seller initially records a liability for the received payment and later realize the sales related to the same when the transaction is completed.
How to Interpret?
Accrued Revenue is shown as an asset on the balance sheet, but it’s not always as valuable an asset as liquid cash. It is because it takes effort related to billing and collection from the customer to convert it into cash. Having large amounts of accrued revenue can adversely impact the working capital cycle. It can be a sign that a company isn’t efficient in getting its customers to pay for its services.
This concept is required to match revenues with expenses properly. The absence of accrued revenue may result in presenting excessively low initial revenue and low profits levels for a business, which does not indicate the true picture of the entity. Also, not using such accrued revenue may results in lumpier revenue and profit recognition as revenues are only be recorded when invoices are issued, which happens typically after longer intervals.
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