Accounting for business revenue seems straightforward, at first glance. You need to document how much money is coming in, what you’re selling in exchange for it, and when this exchange occurs. But for businesses, reconciling revenue is rarely that simple.

One reason for this is because many businesses don’t receive customer payments at the same time they deliver goods and services. For B2B and B2C businesses that operate subscription models or offer a variety of payment options—especially companies that have scaled to a larger operation—the revenue landscape is even more complex. Payment and fulfillment can take place months, or even years, apart. This is where accrual accounting comes in. Accrual accounting means recording revenue when it’s earned, not when you receive the payment.

Understanding how accrued revenue factors into a company’s broader financial landscape is important for building a strategic approach to accounting. Below, we’ll cover what you should know about accrued revenue: what it is, how to record it, its significance in accounting, how it occurs in different industries, and the impact it can have on a company’s financial statements.

What’s in this article:

• What is accrued revenue?
  
• What is the accrual accounting principle?
  
• What is the difference between accrual accounting and cash-based accounting
  
• What is the difference between accrual revenue and accounts receivable?
  
• Accrued revenue vs. deferred revenue
  
• Is accrued revenue an asset or liability?
  
• Accrued revenue examples by industry
  
• How to receive accrued revenue
  
• How Stripe can help
  

What is accrued revenue?

Accrued revenue is income that a company has earned but for which it has not yet received payment. This type of revenue occurs when a company performs a service or delivers a product before it bills the customer. In accounting terms, it is considered to be an asset until the company invoices the customer and receives payment.

Accrued revenue is a key concept for accounting and financial analysis, as it measures the revenue that a company expects to receive in the future while also providing a way to track the performance of a business over time. Because accrued revenue can have a significant impact on a business’s financial statements, it’s important to track and record it accurately.

Accrued revenue examples

For example, a company might provide consulting services to a client in December but not issue an invoice until January of the following year. In this case, the company would record the revenue as “accrued” in December and recognize it as “received” in January, when the invoice is paid.

Another example is a construction company that works on a project over six months. If work starts in May but the customer doesn’t pay until October, the business would record the revenue as “accrued” in May and would wait to recognize it as “received” until October, when the payment is made.

What is the accrual accounting principle?

Businesses must handle accrued revenue according to the accrual accounting principle, one of the fundamental principles of accounting. The accrual accounting principle states that revenues and expenses should be recognized in the financial statements that correspond to when they are earned, regardless of when payment is received. In other words, accrual accounting focuses on the timing of the work that a business does to earn revenue, rather than the timing of payment.

Under the accrual accounting principle, a business records revenue when it has provided the goods or services to its customers, even if the business has not yet received payment. Similarly, a business records an expense when it has incurred the cost, even if it has not yet paid for it. This gives businesses a more accurate and complete picture of their financial performance and a better understanding of their overall financial position.

Some of the accrual accounting principles include:

• Revenue recognition
  Revenue should be recognized when it is earned, regardless of when payment is received.
  
• Matching principle
  Expenses should be matched with the corresponding revenue in the same period.
  
• Conservatism principle
  Revenues and gains should be recorded only when they are reasonably certain, and expenses and losses should be recorded as soon as they are probable.
  
• Going concern principle
  One can assume that a company will continue to operate for the foreseeable future, and that it will not liquidate or go bankrupt.
  

The accrual accounting principle is widely used by companies of all sizes, across different industries. The Internal Revenue Service (IRS) requires US businesses with $25 million or more in revenue over a three-year period to use accrual accounting, and it’s always required for companies that carry inventory. Generally accepted accounting principles (GAAP) in the US and International Financial Reporting Standards (IFRS) also encourage businesses to use accrual accounting for consistent financial reporting. It provides a comprehensive representation of a company’s financial position, which is important for helping investors, analysts, and other stakeholders make informed decisions about the company.

What is the difference between accrual accounting and cash-based accounting?

Accrual accounting and cash-based accounting are different accounting methods. Accrual accounting records payments and expenses when services or goods are provided, while cash accounting records payments and expenses when the cash is received or paid. Cash-based accounting is typically used by small businesses that don’t handle inventories or complex financial transactions.

What is the difference between accrued revenue and accounts receivable?

Accrued revenue and accounts receivable are both related to revenue that a company has earned but has not yet received payment for, but they represent different stages in the revenue recognition process.

Here are the key differences:

• Accrued revenue is recognized when the revenue has been earned, but accounts receivable revenue is recognized when an invoice has been sent.
  
• Both accrued revenue and accounts receivable are considered assets on the balance sheet, but accounts receivable is listed separately from accrued revenue.
  
• Accrued revenue is recognized in a business’s income statement under the heading “unearned revenue,” while accounts receivable is recognized under the heading “receivable” or “trade receivable.”
  

Аccrued revenue vs. deferred revenue

Accrued revenue and deferred revenue are similar concepts, but they have slightly different meanings. The main difference is that accrued revenue is recognized when it is earned, regardless of when payment is received, while deferred revenue is recognized when payment is received, regardless of when the revenue is earned.

Deferred revenue typically occurs when a company receives an advance payment for a service that will be provided in the future. In this case, the company will have a liability on the balance sheet, and it will not record the revenue until the service is provided.

Unlike accrued revenue, deferred revenue is considered a liability because the company has a legal obligation to provide the service or product in the future. It is recorded as “unearned revenue” in the income statement.

Deferred revenue examples

In a SaaS subscription model, deferred revenue can happen in a few different ways:

• Annual subscription
  If a SaaS company offers an annual subscription with a discounted price, and a customer pays the full amount in advance, the company would recognize the revenue over the course of the year as it provides the service to the customer.

• Prepaid subscription
  If the same SaaS company offers a prepaid subscription in which a customer pays for several months of service in advance, the company would recognize the revenue over the course of the prepaid period as it fulfills its obligation to the customer.

In both examples, the customer has already paid for the service, but the company has not yet earned the revenue by providing the service, so the amount is logged as “deferred revenue.” The deferred revenue will be recognized as earned revenue in the future, when the company provides the service to the customer. This follows the accrual accounting principle, which states that revenue should be recognized when earned, regardless of when payment is received.

Is accrued revenue an asset or a liability?

Accrued revenue is recognized as an asset on the balance sheet, because it represents revenue that has been earned but not yet received. Since the company has provided goods or services associated with the revenue, its obligation is met, which means it can count the revenue as an asset, rather than a liability. Accrued revenue is considered a current asset because it is expected to be collected within one year or less.

How is accrued revenue recorded in accounting?

Recording and tracing accrued revenue properly depends on how it is handled as time goes on and payment begins to come in. Accrued revenue is typically recorded as a debit to an “accrued revenue” account and a credit to a “sales” or “revenue” account, and the amount of accrued revenue is adjusted periodically to reflect the current amount of revenue that has been earned but not yet received. Once the revenue is received, the accrued revenue account is reduced, and the “cash” account is increased, resulting in an increase in the company’s cash balance.

Subscription-based revenue accrual example

Let’s say a company provides a subscription service to customers for $100 per month. At the beginning of January, the company has 100 customers who have signed up for the service and pay on a monthly basis. At the end of January, the company has provided the service for the month but has not yet received payment from the customers.

The company would recognize $10,000 ($100 x 100 customers) as accrued revenue on the balance sheet at the end of January, because it has earned the revenue but has not yet received payment. The company would record a debit of $10,000 to the accrued revenue account and a credit of $10,000 to the revenue account.

At the end of February, the company would again adjust the accrued revenue account to reflect the current amount of revenue that has been earned but not yet received. If in February one of the customers cancels their subscription, and another customer has not paid their bill, then the company would reduce the accrued revenue account by $200 ($100 for the canceled subscription and $100 for the customer who has not paid) to reflect the current amount of revenue that is expected to be collected. The company would then record a debit of $200 to the “bad debt expense” account and a credit of $200 to the accrued revenue account.

If all of the customers pay their bills on time in March, the company would reduce the accrued revenue account by $10,000 and record a debit of $10,000 to the cash account. The process of adjusting the accrued revenue account—to reflect the current amount of revenue that has been earned, but not yet received—would continue each month.

Accrued revenue examples by industry

Accrued revenue is common in many industries, and it can have a big impact on the financial statements of companies at all stages of growth. Accrued revenue can show up in different ways, depending on the type of company, what it offers customers, and how it structures its customer relationships and payments.

Here are a few examples of accrued revenue in different industries:

• Consulting services
  A consulting firm provides services to a client in June but doesn’t issue an invoice until February of the following year. The consulting firm would record the revenue as “accrued” in June and recognize it as “received” in February, when the invoice is paid.

• Software subscriptions
  A software company gains a new customer who pays for a yearlong subscription in advance. The company recognizes the revenue on a monthly basis as the services are provided.

• Construction
  A construction company finalizes a contract to build a house and receives a deposit. If the work is not completed until the next financial period, the revenue is accrued as earned but not yet received.

• Advertising
  An advertising agency is hired to run a new advertising campaign in the next quarter. If the client pays for the service up front, the revenue is accrued as earned but not yet received.

• Insurance
  An insurance company receives a premium from a customer for a policy that covers a full year. The company will recognize the revenue on a monthly basis as the services are provided.

• Online marketplaces
  An online marketplace allows individual businesses to list their products for sale on the platform, and the marketplace charges businesses a commission on each sale. If a business makes a sale in March, but doesn’t pay the fee to the marketplace until January of the following year, the marketplace would record the fee as “accrued” in March and recognize it as “received” in January, when payment is made.

How to record accrued revenue

Here are the key steps involved in the process of recording accrued revenue.

1. Identify the revenue

The first step is to identify the revenue that the business has earned but for which it has not yet received payment. This may include services or products that have been delivered but not invoiced, or subscriptions that have been activated but not billed.

2. Create a balance sheet entry

Once you have identified the revenue, record the revenue in a balance sheet entry. The entry will typically involve a debit to an accrued revenue account and a credit to a revenue account.

3. Update the financial statements

The new balance sheet entry will update the balance sheet to reflect the accrued revenue and will also update the income statement to reflect the revenue earned.

4. Invoice the customer

After recording the accrued revenue, invoice the customer for the service or product provided.

5. Record the payment

Once you receive payment from the customer, you recognize the revenue as received. Record the payment in a new balance sheet entry, which usually involves debiting the cash account and crediting the accrued revenue account.

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