A company’s income statement includes various types of revenue, each reflecting different sources and timing of income.
How businesses recognize and report revenue depends largely on when and how it was earned or received. Accrued revenue differs from other types of income, as it represents revenue that has been earned but not yet received.
What is Accrued Revenue?
Accrued revenue is defined as income that has been earned but not yet received. It is reported as a current asset on the balance sheet under the assumption that the company will receive it in the near future, often within one year.
This approach to reporting revenues follows Generally Accepted Accounting Principles (GAAP) and gives investors a better understanding of the company’s financial health.
To illustrate, let’s consider an example.
A retail store is due to receive a payment from its suppliers for goods that have already been delivered.
The invoice is dated March 1, but the payment will not be received until April 15.
In this case, the accrued revenue is reported on the balance sheet as of March 1, even though the payment hasn’t been received yet.
This is why revenue recognition can be challenging; businesses must understand how to recognize and report revenue correctly.
Accurately accounting for accrued revenues ensures accurate financial records and provides investors with transparent information about the company’s performance.
Synonyms
- Accrued Sales
- Accrued Receivables
- Accounts Receivable
Why Accrued Revenue Matters
Accrued revenue plays a critical role in providing a comprehensive view of a company’s financial performance and future earning potential. By recognizing revenue that has been earned but not yet received, businesses can more accurately reflect their economic activity within a specific reporting period.
This has several strategic advantages across forecasting, financial analysis, and internal planning.
From a forecasting perspective, accrued revenue allows organizations to project future cash inflows with greater accuracy. Since it represents work that has already been completed, accrued revenue provides a reliable indicator of revenue that is expected to be collected, contributing to more precise budget planning and resource allocation.
In credit evaluations, accrued revenue helps lenders and creditors assess a company’s ability to meet its financial obligations. It signals ongoing business activity and pending income, which may support the company’s creditworthiness.
When measuring profitability, accrued revenue ensures that revenue is matched with the expenses incurred to earn it, in accordance with the accrual basis of accounting. This matching principle offers a clearer view of a company’s operational efficiency and long-term profitability trends.
Investors, creditors, and internal stakeholders rely on accrued revenue data to make informed decisions. Investors use it to evaluate earnings consistency and growth potential. Creditors consider it in risk assessments, while internal stakeholders, including finance teams and executives, leverage it to guide strategy, manage cash flow expectations, and align business operations with financial goals.
When Does Accrued Revenue Occur?
Accrued revenue is earned revenue (i.e., the company is entitled to receive it at some point in the future). Unearned revenue is revenue that will be accrued as soon as services or goods are provided to the end customer.
Generally, companies should recognize accrued revenue when they have performed the services they were obligated to do or delivered the goods they agreed to provide.
This means that if a company has already provided its services or products and the customer is only waiting to pay for them, it can report this as an accrued revenue on its balance sheet.
Accrued revenue can also occur when a company is still obligated to provide services or goods but has not yet done so. This could be the case when a customer orders products from a company and makes payment upfront, even though the products have not been delivered yet. In this situation, the company can recognize the revenue as accrued revenue on its balance sheet.
For service contracts that operate under ASC 606 guidelines, accrued revenue occurs once all contract obligations have been met, not when an invoice is sent or payment is received.
Accrued Revenue Criteria
How a business accrues revenue sometimes depends on the company and its specific revenue streams.
Some companies may use “accrual accounting” to recognize and report revenue, while others use different criteria such as customer credit terms, invoice payment records, and delivery notes.
When properly recognizing accrued revenue, there are several key criteria that businesses should consider:
- Delivery Notes: Companies must keep accurate records of all the goods that have been delivered (e.g., number of items, date of delivery). For Software-as-a-Service (SaaS) companies, digital agencies, and other businesses that don’t sell tangible goods, delivery notes may include installation, administration, and usage records.
- Invoice Records: Organizations should maintain accurate records of all invoices sent, including any payment terms and deadlines. Most accounting and bookkeeping tools keep records of invoices automatically, so businesses using accounting software don’t have to worry too much about this.
- Customer Credit Terms: Understanding a customer’s credit terms is essential for proper revenue recognition. Companies should be familiar with the payment schedule and any sales discounts or deductions that may be taken.
Each of these systems helps businesses recognize and report accrued revenue, whether it is from goods or services that have already been delivered or goods and services that will be delivered in the future.
Revenue Recognition Principle
The revenue recognition principle is the gold standard for revenue recognition. It states that revenue should be recognized when it is earned, not when they receive cash or send an invoice.
In practice, this means that businesses should recognize their accrued revenues when they have earned them, regardless of when any money is physically received.
The reason companies need to report revenue this way is to ensure that the reported financial results provide an accurate representation of a company’s monthly revenue generation.
If companies could recognize their revenues based solely on when invoices were sent or payments were received, this wouldn’t accurately reflect the total value of a company’s performance.
For example, if a business sent out an invoice for services provided in March but didn’t receive payment until April, reporting the revenue in April wouldn’t accurately reflect the performance of the business for that month.
How to Record Accrued Revenue
Accrued revenue occurs when goods or services have been delivered and earned, but payment has not yet been received or invoiced. To record it under accrual-basis accounting, create an adjusting journal entry at the end of the accounting period. Debit a receivable account, often labeled “Accrued Revenue” or “Unbilled Receivables” (a current asset), and credit the appropriate revenue account so the income statement reflects the revenue in the correct period.
When the customer is invoiced, you may move the accrued amount into Accounts Receivable, and upon payment, debit Cash and credit the receivable to reflect collection. This ensures compliance with the revenue recognition principle and the matching principle, which aligns revenues and expenses in the same period.
Note: Accrued revenue applies only to accrual accounting. Under cash-basis accounting, revenue is recognized only when cash is received, so no accrual entry is recorded.
Accrued Revenue vs. Deferred Revenue
Accrued revenue and deferred revenue are both important concepts when it comes to managing a company’s finances. While they are related, they are also opposites.
Accrued revenue is income that has been earned but not yet received in cash or recorded on an invoice. This can happen if goods or services have been delivered, but invoices have not been sent out.
Deferred revenue, on the other hand, is income received from sales transactions but not yet earned by delivering goods or services.
This typically happens when customers pay for products before they are delivered. The funds received are then recorded as deferred revenue until the goods or services have been delivered and the income can be recognized as revenue.
Accrued Revenue vs. Accounts Receivable
Both accrued revenue and accounts receivable represent money a company expects to receive, but they differ in timing and the billing process.
Accrued revenue arises when a company has earned income by delivering goods or services but has not yet issued an invoice. This commonly occurs when work is performed over time or when the billing cycle lags behind service delivery. Under accrual accounting, this revenue is recognized when earned, regardless of whether an invoice has been sent. It is typically recorded as a current asset on the balance sheet, reflecting the company’s expectation of receiving payment in the near future.
Accounts receivable, on the other hand, represents money owed to the company after an invoice has been issued. It reflects revenue that has not only been earned but also formally billed, creating a clear contractual or documented obligation for the customer to pay. Accounts receivable is also classified as a current asset.
Best Practices for Managing Accrued Revenue
Effectively managing accrued revenue is essential for ensuring accurate financial reporting, maintaining compliance, and supporting strategic decision-making.
These best practices will help your organization manage accrued revenue accurately and consistently:
Regular Reconciliation of Earned vs. Billed Amounts
To ensure financial statements reflect true business performance, companies should regularly reconcile earned revenue with amounts that have been billed. This process helps identify discrepancies early, prevent revenue leakage, and maintain audit readiness. Timely reconciliation also supports more accurate forecasting and budgeting by providing a clearer picture of outstanding receivables.
Automate Revenue Recognition Processes
Manual revenue recognition is prone to human error and inconsistency, especially in high-volume or subscription-based businesses. Automating this process using revenue management software ensures that revenue is recorded accurately and in compliance with accounting standards like ASC 606 or IFRS 15. Automation not only improves efficiency but also provides better visibility into revenue streams and reduces the risk of compliance issues.
Align Sales, Billing, and Finance Teams
Accrued revenue touches multiple departments, making cross-functional alignment critical. Sales, billing, and finance teams should operate from a unified revenue recognition policy to ensure consistency in contract terms, invoicing schedules, and revenue timing. Clear communication and integrated systems (such as ERP or CPQ platforms) can help reduce misalignment and ensure that revenue is recognized correctly across the organization.
Applying these best practices will enhance your financial accuracy, streamline operations, and support sustainable growth through reliable revenue management.
Revenue Recognition Technology
Modern revenue recognition technology plays a vital role in helping businesses streamline financial operations and maintain compliance with evolving accounting standards. Automating the revenue recognition process reduces manual effort, minimize errors, and provides real-time visibility into financial performance.
Types of Revenue Recognition Software
Several categories of software support the revenue recognition process, each offering distinct capabilities tailored to different stages of the revenue lifecycle. Automating these processes improves operational efficiency while ensuring consistency in revenue reporting, which is critical for financial transparency and audit readiness.
Quote-to-Cash (QTC) Platforms
Quote-to-cash solutions manage the complete sales cycle, from product configuration and pricing to contract signing and payment collection. These platforms often integrate with CPQ, billing, and ERP systems to ensure revenue is recognized accurately and in real time.
Contract Lifecycle Management (CLM)
CLM software helps organizations manage customer contracts from initiation through renewal. These tools are essential for tracking performance obligations, credit terms, and any amendments that may affect revenue recognition. CLM platforms also ensure compliance with accounting standards by providing visibility into the legal and financial terms of each agreement.
Billing and Invoicing Software
Billing platforms generate and deliver invoices, manage payment collections, and log revenue transactions. Advanced billing systems, such as DealHub’s billing solution, include built-in revenue recognition features that automate the tracking of earned vs. billed amounts, apply adjustments, and support compliance reporting.
Other Supporting Technologies
In addition to QTC, CLM, and billing platforms, many companies leverage ERP systems, subscription management software, and purpose-built revenue management solutions to ensure accuracy and compliance. CPQ systems also contribute by establishing precise revenue terms during the quoting phase.
Why Technology is Essential
Accurate revenue recognition is a cornerstone of trustworthy financial reporting, yet managing it manually is complex and time-consuming. Technology reduces this burden by standardizing processes, improving data accuracy, and ensuring timely reporting.
Revenue Technology
Types of revenue recognition software available:
Quote-to-cash
Manage the sales process.
Contract Lifecycle
Track customer agreements, credit terms, and revenue.
Billing Software
Generate invoices and records revenue transactions.
People Also Ask
What is an example of accrued revenue?
Accrued revenue is income that has been earned but not yet received in cash or recorded on an invoice. For example, a digital marketing agency that completes its contracted work with a client in February but receives payment in March would record the revenue as accrued in February and then as cash received in March.
Is accrued revenue an asset?
Accrued revenue is revenue that wouldn’t otherwise show up in the general ledger. At the end of an accounting period, the receiving company (i.e., the product or service provider) records accrued revenue as an asset. However, the company using the product or service will record it as an accrued expense, which is a liability.
What is the journal entry for accrued revenue?
Regarding accrued revenues, revenue journal entries require a credit to the revenue account with a corresponding debit to accrued revenue.
Are accrued revenues on income statements?
The income statement records accrued revenues as “earned revenue.” This means the revenue has been earned but not yet received. The amount is reported in the current period as an adjusting entry to accurately record all revenues.
What is the accrual accounting method?
The accrual accounting method is a system of accounting in which revenues and expenses are recorded when they are earned or incurred, regardless of when cash is actually received or paid. This method aligns income and expenses with the period in which they relate, providing a more accurate picture of a company’s financial performance.
For example, under the accrual method, a business would record revenue when a service is performed, even if payment is not received until a later date. Similarly, expenses are recorded when they are incurred, not necessarily when they are paid. This approach follows the matching principle in accounting, which ensures that income and related expenses are reported in the same period.
Accrual accounting is widely used and is required under GAAP for public companies, as it offers a more complete and realistic view of a company’s financial health compared to cash-based accounting.
Is accrued revenue the same as accrued sales?
Not exactly. Accrued sales are a type of accrued revenue that specifically relates to completed sales that have not yet been invoiced. Accrued revenue is a broader term that includes all income earned but not yet received or billed, such as service fees, royalties, or interest. In short, all accrued sales are accrued revenue, but not all accrued revenue is accrued sales.