People who are not much into businesses and investments might think that revenue is simply revenue. However, there are different kinds of revenue. We have absolute revenue, relative revenue, and many more. Today, we are focusing on accrued revenues. They are revenues generated from offering goods and services. However, no cash is received or involved. Hence, these revenues are the receivables that we see in balance sheets that stand as money. Also, these are the customer’s debt from the business for the goods and services bought.
Tell me more about accrued revenue.
Revenue recognition and matching principles and accrual accounting lead to accrued revenue. When we say revenue recognition principle, we are talking about revenue transactions that need recording in a similar accounting period when they are earned. It is in place of cash payment for every product or service receive. When we say matching principles, we refer to an accounting concept aiming to tie revenue generated in a specific accounting period to the costs generated to make revenue.
According to GAAP (Generally accepted accounting principles), the time that accrued revenue is acknowledged and recognized is when the involved entity excellently executes the performance obligation. For instance, revenue gets recognized after a sales transaction, and the good or product goes to the customer. Also, it should not matter which mode of payment the customer used that time.
The service industry and accrued revenue are closely related. These revenues commonly appear in business financial statements. Why? There would be a delay in revenue recognition until the work ends. This work that we are talking about may take quite some time. It may be for several months. The process is totally different from manufacturing. In manufacturing, invoice issues are given right after product shipment. Accrued revenue helps in making revenue and profit go smoothly. Hence, there will be no wrong impressions of the business’s real value.
How can I record revenue?
The straightforward answer is the adjusting journal entry. Here, the accountant will debit an asset account and look at the accrued revenue. It will be in reverse when the revenue’s exact amount gets collected. Hence, accrued revenue is credited. Accrued revenue will show us the things that we cannot see in the general ledger after periods. Some companies call accrued revenues “accrued expense” when they need accrued revenue recording. In the balance sheet, this is seen as a liability.
On the initial recording of the accrued revenue, the amount’s income statement recognition uses credit to revenue. Now, there is a term called accounts receivable. If there is a debited related accrued revenue on the company’s balance sheet, it can be in an accounts receivable form. Here, the company accountant will record the adjustment to the account where the asset is for accrued revenue. This will massively impact the balance sheet. Going back to our answer, which is the adjusting journal entry, this is what the accountant would make. Here is where the customer’s cash will be debited going to the balance sheet’s cash account. The account would be reduced because a similar amount would be credited to the receivable account or the accrued revenue account.