When running a business, tracking the amount of revenue coming in and whether it is sufficient enough to pay for the various operational cost of the business is an important metric. Under accrual accounting, the amount of revenue coming in from the sale of a product or service is recognized as revenue on the books regardless of when cash payment. This is why the accrued revenue adjusting entry is used to report revenue that has not yet been received.
The adjusting entry for accrued revenues is, therefore, a product of accrual accounting which is based on revenue recognition and matching principles. The revenue recognition principle requires that revenue is recorded in the same accounting period that it is earned, rather than when the cash payment is received. The matching principle, on the other hand, is an accounting concept that requires that the revenue generated in an accounting period is matched to the expenses incurred to generate that revenue.
Therefore, under generally accepted accounting principles (GAAP), accrued revenue is recognized as revenue when a sales transaction is made and the customer takes possession of the good, regardless of when the customer pays. Hence, the adjusting entries for accrued revenue are made in accordance with the GAAP. In this article, we will discuss how to make an accrued revenue adjusting entry with examples.
Related: Adjusting entry for inventory
Accrued revenue explained
Accrued revenue is the unbilled revenue that is recognized but not yet realized. It is the revenue that has been earned by a business through a sale that has already occurred but the invoice is yet to be billed to the customer and cash has not yet been received from the customer. Typical examples of accrued revenues may involve interest revenue and completed services or delivered goods that have not been billed to customers.
Accrued revenue is usually common in the financial statements of businesses in the service industry. This is because until the work or service is finished, revenue recognition would be delayed, which might last several months compared to the manufacturing industry, where invoices are issued as soon as products are shipped.
For instance, if a company offers net-30 payment terms to a customer, he can decide to purchase an item on May 1 and would not be required to pay for the item until June 1. If the product, for example, costs $100, for the month of May, the company would record accrued revenue of $100. Then, when June 1 rolls around and the payment is received, the company would then make an adjusting entry for accrued revenue of $100 to account for the payment.
This means that accrued revenue is recorded in the books when revenue has been earned by providing a good or service, but no cash has been received. On the flip side, the company that purchases the good or service but hasn’t been billed yet will record the transaction as an accrued expense, under the liability section on the balance sheet. Accounting records that don’t record the adjusting entry for accrued revenues would end up understating the company’s total assets, total revenues, and net income.
See also: When are adjusting entries recorded?
Accrued revenue adjusting entry
The journal entry for accrued revenue is one of the types of adjusting entries in accounting. When a business accrues revenue, the amount is initially recorded and recognized on the income statement as revenue, and an associated accrued revenue account on the balance sheet is debited by the same amount, usually in the form of accounts receivable. Then when the customer has been billed (or makes payment), adjustments for accrued revenues would be made. Hence, the adjusting entry to record an accrued revenue is a debit to the cash account on the balance sheet, and a credit to the accrued revenue account or accounts receivable account, to reduce the account.
That is, the journal entry to record accrued revenue is:
|Accrued revenue/ Accounts receivable||00|
Then, the adjusting entry to record an accrued revenue is:
|Accrued revenue/ Accounts receivable||00|
It is important to record the adjusting entry for accrued revenues in order to keep the balance sheet in balance. This will not change the revenue recognized on the income statement but will help to track the correct amount of cash received and track the correct amount of revenue accrued. By making adjustments for accrued revenues, you record an increase in revenue and an increase in money owed to you so that your ledgers, trial balance, and financial statements, will be in compliance with the generally accepted accounting principles (GAAP) for revenue recognition.
Examples of accrued revenue adjusting entry
Let’s look at some examples to understand the adjusting entry for accrued revenues:
Adjusting entry for accrued revenue: example 1
Assuming a customer owes 6% interest on a 3‐year, $10,000 note receivable to ABC Company but has not yet made any payments. At the end of each accounting period, ABC company has to recognize the interest revenue that has accrued on this long‐term receivable.
Calculating the interest on the note receivable with the following formula:
Principal x annual interest rate x time period in years
= $10,000 x 6% x (30/365) =$49.315
Since ABC company accrues $49 in interest revenue during the month, an accrued revenue journal entry is made to increase the asset account (interest receivable) by $49 and to increase the revenue account (interest revenue) by $49:
Then, when the interest is paid, an adjustment for accrued revenues would be made:
Accrued service revenue adjusting entry: example 2
Assume you offer plumbing services and do $90 worth of work for a customer on the last day of April but you don’t send a bill until May 4; you will have to recognize the revenue in April’s accounting records. That is, you record this accrued revenue by making an entry to increase accounts receivable by $90 and increase service revenue by $90:
Then, when you send the bill to the customer and the customer pays, you make an adjusting entry for accrued revenue:
Accrued revenue adjusting entry: example 3
In December, ABC Ltd does a job for XYZ Corporation worth $5,000. When the accountant of ABC Ltd was analyzing the trial balance accounts, he finds that the customer has not been billed, so the earned revenue is not showing up in Accounts Receivable or in Service Revenue. Hence, the accountant would make the following accrued revenue adjusting entry on December 31:
|Dec 31||Accounts receivable||$5,000|
Then, when XYZ company has been billed and pays the owed amount, the accrued revenue adjusting entry would be:
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