Unbilled Revenue

What is Unbilled Revenue?

Unbilled revenue is recognized revenue a business hasn’t billed its customers for. In other words, the business has earned the revenue by delivering its contracted goods or services, but hasn’t yet generated an invoice to collect payment from the customer. Also called accrued revenue, it’s reported as an asset on the balance sheet.

There are three reasons your business might have unbilled revenue:

1. Invoice delays. If your system delays a customer invoice after a recurring billing date, any payments made during that lag period will be considered unbilled receivable. This highlights the significance of a dependable subscription billing platform: having accurate, automated, and timely invoices every time saves you from this issue.
2. Advance payments. Receiving payment in advance of a billing date is classified as an unbilled receivable since you haven’t generated the invoice for the service yet. This happens when customers upgrade their product or purchase add-on services during their subscription period.
3. Agency/contractor billing. Since revenue is recognized when it’s earned, not necessarily when cash is received, agencies and contractors that invoice their clients after providing services or hitting contract milestones will have unbilled revenue on their balance sheets.
4. One-time projects. SaaS companies may bill customers for implementation or onboarding after completion.

While a company’s unbilled revenue isn’t sitting in its account just yet, it’s still a critical component of its financials. It represents work they’ve already done, so there is no contingency on whether they will ever receive the payment for it. Instead, unbilled revenue is simply awaiting invoicing and collection.

Synonyms

• Unbilled A/R
• Unbilled receivables
• Accrued revenue

Importance of Tracking Unbilled Revenue

Tracking unbilled revenue is important for three reasons:

• You have to recognize that revenue. To comply with Generally Accepted Accounting Principles (GAAP), a company needs to recognize revenue when it’s earned, even if there isn’t an invoice to show for it. The first step to knowing when and how much revenue to recognize from your contracts is tracking it in the first place.
• It’s a crucial part of your overall financial performance. Accrued revenues are part of the bigger picture. Your finance team needs to know how much the company stands to earn from invoices in the near future to plan the company budget, consider investment options, and prepare accurate revenue forecasts.
• It prevents revenue leakage. Properly accounting for all your accounts receivable ensures you aren’t losing out on any potential income due to forgotten or missed invoices and incorrect tracking.

Translation: If you don’t track and account for unbilled revenue, you’ll…

• be GAAP-noncompliant.
• make critical high-level business decisions based on incomplete financial data.
• lose money from billing errors and customer contracts your team failed to account for.

Each of these risks can cost your business millions. Accounting for the revenue you haven’t invoiced yet is an easy way to protect yourself from these potential pitfalls.

Deferred Revenue vs. Unbilled Revenue

Deferred revenue is the opposite of unbilled revenue. It’s money a company has collected from customers, but hasn’t earned yet. This happens when customers pay in advance for goods or services that have not yet been delivered.

Referred to as a prepayment in non-accounting terms, deferred revenue is a liability on the balance sheet until the company delivers its product or renders its service. At that point, it becomes sales revenue on the income statement.

This is different from unbilled revenue, which represents income you’ve already done the work to earn. While deferred revenue is a liability because you’re the one owing a product or service to the customer, unbilled revenue is an asset since it’s payment they owe you, and you’ve already fulfilled your end of the bargain.

Another important distinction is that businesses don’t recognize deferred revenue. Even though deferred revenue is sitting in your account, it’s only recognized as revenue when the company fulfills its obligation to the customer (i.e., it’s “earned”). For this same reason, you’ll recognize unbilled revenue ahead of the payment.

How to Account for Unbilled Revenue on Balance Sheet

In accrual-basis accounting, businesses use the balance sheet to keep track of unbilled revenue. It’s recorded as an asset, with a corresponding credit to the revenue account. It does not impact the income statement.

1. Identify unbilled revenue. This includes all the revenue you’ve earned from completed or ongoing projects that you haven’t yet invoiced, plus voluntary advance payments from customers (for which you haven’t generated an invoice yet).
2. Record unbilled revenue as an asset. Create a new Asset account on your balance sheet. Once you’ve identified the total amount for this category, record it.
3. Adjust the unbilled revenue account as you invoice customers. As you invoice your customers for the work, it will no longer be unbilled. It becomes accounts receivable.

To understand how to make journal entries and reflect them on financial statements, let’s look at an example.

Suppose CloudTech, a B2B software company, agrees to build a custom CRM system for an enterprise customer. The project timeline is 12 months and the total cost will be $60,000.

The contract states billing for development and implementation takes place at the end, but there are two milestones: the end of month 6 for the first iteration of the software and the final product at 12 months. Each milestone is worth half the total contract value, or $30,000.

Upon hitting the first milestone at the 6-month mark, CloudTech must make the following journal entry:

• Debit: $30,000 to Unbilled Revenue
• Credit: $30,000 to Revenue Account

Once the project is complete at the 12-month mark, they will reverse the previous accrual:

• Debit: $30,000 to Revenue Account
• Credit: $30,000 to Unbilled Revenue

Since they will also bill the client, it will no longer be unbilled revenue. CloudTech will have to reflect an addition to accounts receivable:

• Debit: $60,000 to Accounts Receivable
• Credit: $60,000 to Revenue Account

How to Recognize Unbilled Revenue from Contracts

Depending on where your company is doing business, you will have to follow ASC 606 or IFRS 15 standards for revenue recognition. 

ASC 606 Standard

ASC 606 is the revenue recognition standard under GAAP. It provides a five-step process to identify, measure, and report revenues from contracts with customers.

1. Identify the contract with a customer. If you have a contract, you’ve already done this.
2. Identify the contract’s performance obligations. These are promises to deliver goods or services, and they form part of your agreement with the customer.
3. Set the transaction price. This is the total amount your company expects to earn (and your customer must pay) in exchange for transferring goods or services.
4. Allocate the transaction price to performance obligations. Allocate revenue based on value delivered to date (e.g., milestones) or upon completion, depending on how you’ve agreed with customers.
5. Recognize revenue when you satisfy a performance obligation. This happens when you’ve delivered the product or service, and the customer has control over it. For example, if you’ve passed a milestone in an implementation project, you’d recognize that portion of the revenue even if you’re paid months later at the contract’s end.

IFRS 15 Standard

IFRS 15 is a similar revenue recognition principle, but it applies to international companies operating in multiple jurisdictions, including Canada, Australia, and the European Union.

Under IFRS 15, the same five-step process exists. The main difference between the two is that ASC 606 allows firms to create a policy that excludes sales tax from the price of the transaction. IFRS 15 does not.

How Billing Technology Helps to Minimize Unbilled Revenue

Depending on the nature of your business, you’ll always have some unbilled revenue. But, since it’s payment customers owe you for work you’ve already done, you want to keep it at an absolute minimum.

This means:

• Using subscription management software to ensure timely, accurate, and automated customer billing.
• Setting up automated alerts for contracts that are about to reach milestones and completion.
• Providing customers with a self-service portal to manage their subscriptions, upgrades or downgrades, payment information, and invoices.
• Setting up a dunning management program to minimize Days Sales Outstanding.
• Generating reports to help you track unbilled revenue, quicken collection efforts, and improve future forecasting. These can include insights on deferred revenue (the value of services not yet delivered), unbilled revenue (the value of services delivered but not billed), and revenue backlog.
• Integrate your billing system with other business tools to maintain a single source of truth for customer information, payment details, contract terms and conditions, etc.

In addition to handling all of this, billing software integrates with your bookkeeping platform. Instead of manually accounting for every one-time in-app subscription purchase or delivery milestone, your software can do it in real-time thanks to revenue recognition automation capabilities.

People Also Ask