What Is an Accrued Revenue?

Accrued revenue enables companies to record revenue earned but not yet received, ensuring accurate financial reporting and cash flow depiction.

Oct 16, 2024 at 03:03 pm

What Is Accrued Revenue?

1. Definition

Accrued revenue refers to revenue that has been earned by a company but has not yet been received in cash. It represents transactions where goods or services have been provided to customers but have not been invoiced or collected.

2. Recognition

Accrued revenue is recognized in the accounting period in which the revenue is earned, regardless of when the cash is received. This is in accordance with the accrual accounting principle, which requires transactions to be recorded in the period in which they occur, not when cash is received or paid.

3. Example

For example, if a company provides services to a customer on December 31st, but invoices the customer on January 5th, the revenue is recognized on December 31st. The company would record an accrued revenue account receivable on December 31st.

4. Importance

Accrued revenue is an important factor in determining a company's financial performance and cash flow. It ensures that the revenue earned by a company is accurately reflected in the financial statements.

5. Types of Accrued Revenue

There are two main types of accrued revenue:

• Service revenue: Accrued from services rendered but not yet invoiced.
• Goods revenue: Accrued from goods sold but not yet invoiced.

6. Balance Sheet Presentation

Accrued revenue is presented as a current asset on the company's balance sheet. It is typically included under the accounts receivable category.

7. Impact on Cash Flow

Accrued revenue does not impact a company's cash flow until the revenue is collected. Therefore, a high level of accrued revenue can indicate that a company is recognizing revenue more quickly than it is collecting it, potentially leading to cash flow issues.

8. Disclosure

Companies are required to disclose significant amounts of accrued revenue in their financial statements to provide transparency to investors and creditors.