Accrued revenue. Revenue earned for goods or services delivered but not billed to the customer yet. This is sometimes called unbilled revenue.

Let me tell you a little secret. The finance and accounting team does not really like accrued revenue. But if we have to record accrued revenue as an adjusting entry, in order to state the books correctly, we will!

In some companies, there is no need to record accrued revenue. In other companies, due to their operational process, their billing process, or the way their systems are set up, accrued revenue journal entries are needed at the end of the accounting period. It’s a matter of principle, more specifically the matching principle. Expenses should be recorded during the period in which they are incurred. Revenues should be recorded during the period in which they are earned.

⏱️TIMESTAMPS⏱️
0:00 Accrued revenue definition
0:26 When does accrued revenue occur
3:11 Matching principle and adjusting entries
3:37 Journal entries for accrued revenue
4:58 How to avoid the need for accrued revenue

Here are the journal entries for accrued revenue. Step one is the adjusting entry at period-end. Debit accrued revenue on the balance sheet, credit revenue in the income statement. Make sure that when you make a revenue accrual, you also post the related journal entry of cost of sales! Debit cost of goods sold in the income statement, credit inventory on the balance sheet. This way, the margin that is made on the sales is stated correctly!

Step two is to issue the invoice in the new accounting period. Debit accounts receivable on the balance sheet, credit accrued revenue on the balance sheet. This brings the balance of the accrued revenue account on the balance sheet back to zero, it is cleared out. If you record to accounts receivable on the balance sheet, you need an invoice number and other critical information. Accrued revenue is an account used on a more summarized and less detailed level.

Step three is for the customer to pay the invoice. Debit cash, credit accounts receivable. At the end of the billing and collections cycle, we have 100 of revenue in the income statement, 100 of cash in the bank, and 50 in cost of goods sold, but it took us an extra journal entry, through the accrued revenue account on the balance sheet, to get there.

This video on accrued revenue is part of a series on #adjustingentries that also includes videos on accruals, prepayments, and deferrals: https://www.youtube.com/watch?v=lBvnSgIGVnU&list=PLKbmcnUUQMlki7e3WKr3k60bJlZ2i-VLC

Philip de Vroe (The Finance Storyteller) aims to make #accounting , finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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