Accrual accounting 101: What accrued revenue is and how to handle it

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  1. Introduction
  2. What is accrued revenue?
  3. What is the accrual accounting principle?
  4. What is the difference between accrued revenue and accounts receivable?
  5. Аccrued revenue vs deferred revenue
  6. Is accrued revenue an asset or a liability?
  7. Accrued revenue examples
  8. How to record accrued revenue
    1. 1. Identify the revenue
    2. 2. Create a balance sheet entry
    3. 3. Update the financial statements
    4. 4. Invoice the customer
    5. 5. Record the payment

Accounting for business revenue might seem straightforward: you need to document how much money is coming in, what you're selling in exchange for it, and when this exchange occurs. But reconciling revenue is rarely that simple. In fact, our recent study surveying 1,700 global finance leaders found that 40% of finance teams spend more than 10 hours each month addressing errors or discrepancies to reconcile their data.

One reason for accounting complexity is that many businesses don't receive customer payments at the same time as delivering goods and services. For B2B and B2C businesses that operate subscription models or offer various payment options – especially companies that have scaled to a larger operation – the revenue landscape is even more complex. Payment and fulfilment can take place months – or even years – apart. How do you account for this revenue?

There are a handful of generally accepted accounting principles that govern how revenue is accounted for in different scenarios and which are important for businesses to adhere to. One of these principles is revenue recognition, which determines how and when revenue is recorded in a business's financial statements. One of the common methods of revenue recognition involves accrued revenue.

Understanding how accrued revenue factors into a company's broader financial landscape is important for building a strategic approach to accounting. What follows is an overview of what you need to 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. Revenue recognition is rarely simple, but it is manageable once you understand the right approach.

What's in this article?

  • What is accrued revenue?
  • What is the accrual accounting principle?
  • What is the difference between accrued revenue and accounts receivable?
  • Аccrued revenue vs deferred revenue
  • Is accrued revenue an asset or a liability?
  • Accrued revenue examples
  • How to record accrued revenue

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.

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 recognise it as "received" in January when the invoice is paid.

Another example is a SaaS company that offers a subscription-based service for a monthly or annual fee. If a customer subscribes to the service in December, but doesn't pay the annual fee until January of the following year, the business would record the revenue as "accrued" in December and would not recognise it as "received" until January when the payment is made.

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.

What is the accrual accounting principle?

Businesses must handle accrued revenue according to the accrual accounting principle – one of the fundamental principles of accounting. This principle states that revenues and expenses should be recognised 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 focusing on the timing of the 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 recognised 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 be liquidated or go bankrupt.

The accrual accounting principle is widely used by companies of all sizes, across different industries. 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 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 recognised when the revenue has been earned, but accounts receivable revenue is recognised 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 recognised in a business's income statement under the heading "unearned revenue", while accounts receivable is recognised 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 recognised when it is earned, regardless of when payment is received, while deferred revenue is recognised 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.

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 recognise 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 recognise the revenue over the course of the prepaid period as it fulfils 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 from providing the service, so the amount is logged as "deferred revenue". The deferred revenue will be recognised 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 recognised when earned regardless of when payment is received.

Is accrued revenue an asset or a liability?

Accrued revenue is recognised 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 has been met, which means that 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.

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.

For 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 recognise £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. Imagine that in February, one of the customers cancels their subscription, and another customer has not paid their bill. The company would reduce the accrued revenue account by £200 (£100 for the cancelled 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 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

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 recognise 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 recognises the revenue on a monthly basis as the services are provided.

  • Construction
    A construction company finalises 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 recognise 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 recognise it as "received" in January when payment is made.

How to record accrued revenue

It is one thing to understand the principle of accrued revenue, but it is another thing entirely to implement an accounting practice that reflects this understanding. 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 recognise 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.

Because of the complexity of managing revenue recognition – and the importance of getting it right – many businesses look to solutions like Stripe Billing to fine-tune their accounting and financial reporting. Stripe simplifies revenue recognition without requiring additional engineering time or lengthy configurations, offering tools like recognised- and deferred-revenue summaries at a glance, downloadable accounting reports, interactive revenue numbers, and configurable revenue-recognition rules and accounting-period controls.

For more information about how Stripe Billing supports accrued revenue, start here.

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