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Accrued Revenue

Candlefocus Editor
Accrued revenue is a concept used in accrual accounting that records income or revenue when it’s earned, even if the payment associated with the transaction hasn’t yet been received. The accrual method of accounting, as opposed to the cash-basis method, is used most often by companies to adhere to the Generally Accepted Accounting Principles (GAAP) that require income to be reflected in the period when it is earned, not when it is received. So, rather than wait for an inflow of cash or other asset, such as an accounts receivable, to be collected at a later date, it is recognized immediately. Revenue that has been earned by a business but not yet billed or paid to the business is referred to as revenue accruals.

Accrued revenue is most applicable when a business continues to provide a service over a period of time; although compensation is received in the future, the work involved needs to be recognized immediately. This could be over a quarter, a full year or even longer, such as in the case of a long-term contract. A company will record an accrued revenue journal entry at the end of an accounting period to recognize the revenue activity. Most accrued revenues are recorded with a debit to accounts receivable and a credit to revenue.

To illustrate, if a company provides services to a customer in June, but it has not yet billed the customer, the revenue should still be recorded in the June financial statements. The company will make an adjusting entry to record the income and create an accounts receivable. When the customer pays in July, the accounts receivable will be reduced, and no additional adjusting entry will be required.

Accrued revenues are often difficult to track due to their recognition over multiple accounting periods. This complexity is why it is important for companies to keep precise records of service activities that have yet to be billed. Companies may also need to make estimates of the revenue earned to determine how much to recognize in the current period. As most companies are required to follow the GAAP guidelines for revenue recognition, it is essential for businesses to understand the concept of accrued revenue to ensure accurate and timely financial reporting.

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