Accrued revenue explained: How to record accrued revenue correctly

Running a business isn't always as simple as trading your product or service for cash up-front. When managing large orders and long projects, you may not see a payment right away. While you earn revenue after selling a product or service, payment delays lead to accrued revenues. This accrual accounting contrasts standard cash accounting. 

While accrued revenue doesn't create problems in itself, businesses need to account for this lack of cash flow in financial statements. If a company fails to adjust for accrued revenues, it risks accounting errors and a lower ROI. To help you along, we'll explain accrued revenue and show how you can record it to improve your bookkeeping.

• What is accrued revenue?
• Which industries use accrued revenue?
• Why is accrued revenue important for business?
• When do you earn accrued revenues? 
• Accrued revenue examples
• How accrued revenues fit in the accrual accounting method
• What is the entry for recording accrued revenue?
• What are adjusting journal entries?
• Managing revenue and expense types
• Accrued revenues benefits
• Anticipate earnings and expenses with accrual accounting 

What is accrued revenue?

Accrued revenue is income earned by providing goods or services, but the payment hasn’t been received yet. It’s recorded as current assets on financial statements under GAAP standards.

Accrued revenue is most common in B2B industries where clients receive invoices after receiving a service. Whether you work in construction or SaaS, these invoices can take months to process. Generally accepted accounting principles (GAAP) explain that revenue only accrues after you provide a service.

Which industries use accrued revenue?

Some industries are more likely to leverage accrued revenue than others. Here are a few common industries that may rely on accrued revenue and examples to help you better understand this approach:

Construction

Construction projects, like building a house or renovating, usually have different stages with payments at each milestone. For example, a contractor might get a deposit to start, then more payments after finishing the foundation, framing, or interiors. They record income as they reach each step, even if the final payment comes later.

Real estate

In real estate, landlords often rely on accrued revenue to keep track of rental income. For instance, a landlord may record rent as income at the beginning of the month, but the tenant doesn’t pay until the end of the month.

SaaS (software as a service)

SaaS companies typically receive payments upfront for services delivered over time, like an annual subscription fee. For example, if a customer pays for a year-long subscription, the company records part of that payment as revenue each month as they deliver the service.

Insurance

Insurance companies may also rely on accrued revenue to manage their income. For instance, when a customer pays for business insurance for the whole year in advance, the insurer records part of that payment as revenue each month as they provide coverage.

Why is accrued revenue important for business?

Most businesses accrue revenue and expenses as a part of their standard operations. In verticals like construction, firms earn most of their income as accrued revenue. Conversely, a standard brick-and-mortar retailer accrues expenses when they receive new inventory before an invoice. No matter your field, accrual accounting can affect your bottom line.

By properly managing accrued revenue and expenses, a business can:

Accurately represent their cash flow on financial statements

Accrual accounting accurately reflects money earned and spent, so businesses get a clearer picture of their cash flow.

Account for revenue and expenses before a payment

This method allows businesses to track expenses and revenue as soon as they occur, not just when they get paid.

Tie their transactions to the time they occurred

Businesses get a more accurate sense of financial performance over time when they record transactions as they happen.

Follow GAAP and provide consistent financial reports

Accrual accounting meets GAAP standards, which helps keep a business’s financial reporting consistent and compliant.

When do you earn accrued revenues? 

Accrued revenue shows up on a balance sheet when there’s a mismatch between the service you provide and the amount of money you receive. Most retail transactions are fast enough to avoid this mismatch. Accrued income shows up more often with:

Milestones

On large orders, you can book revenue when you reach project milestones. Milestones refer to specific points in your project schedule. For example, if you’re contracted to build a half-dozen nightstands, every nightstand represents a milestone. The number of milestones and their exact purview varies from project to project. 

Long-term projects

With long-term projects, you accrue revenue based on the percentage of work finished. There isn’t a hard and fast definition for “long-term,” so project durations vary by industry. In accrued accounting, suppose a school hires you as a long-term substitute. Every day you work corresponds to a percent of the job duration, and you make money based on the percentage worked. 

Loans

If you loan out money, the interest counts as accrued revenue. Lenders incur interest at a steady rate, but customers pay that interest back after it’s accrued. So, whether interest payments occur month by month or after paying off the principal, lenders receive their money down the line. You can refer to this income as accrued interest.

Accrued revenue examples

Accrued revenue often pops up with long-term projects and B2B services. However, it can occur in some B2C contexts. Check out the examples below:

B2B Example

Suppose you sell office supplies to small businesses. When a customer orders equipment, you send them an invoice, including the due date. Once your supplies reach a client, they have a couple of weeks to pay your invoice. In the time between your shipment and their payment, you have earned accrued revenue. 

B2C Example

Let’s say you rent rooms in an apartment where you charge rent at the end of each month. You can book accrued revenue if you record a rent payment at the beginning of a month but receive it at the end. In other words, the tenant’s rent is accrued revenue for the month leading up to their payment due date. 

Example of how to record accrued revenue 

If you land a two-month coding project for $20,000, each month represents a milestone for which you’ll earn $10,000. However, you won’t get paid until the project ends. As a result, you have to create an accrued revenue journal entry twice throughout the project—one for each milestone.

How accrued revenues fit in the accrual accounting method

Under accrual accounting, you should record revenue with two principles in mind:

Matching principle

The matching principle ensures you record related expenses and revenues in the same period for accurate financial reporting.

For example, assume you’re hired to build a dresser in the first half of May. In this two-week span, you spend $60 on raw materials and earn $200 for finishing the project. Even if your pay comes later, the matching principle makes you record your expenses and revenue at the same time.  

Revenue recognition principle

Revenue recognition involves recording revenue during the accounting period it’s earned. Additionally, you only earn money after delivering a product or service.

As an example, assume you spend five weeks developing a piece of software. Most of the work took place in February, but you finished the project in March. Based on revenue recognition, you would record the revenue for the accounting period in March since you earned your income upon completion. 

Accrual accounting example

Suppose you run a SaaS company and provide one month of service to a client in September. However, your customer won’t pay for the service until October. 

• With revenue recognition, you record transactions when you earn payment in September, and not when you receive it in October. 
• The matching principle states you must record revenue at the same time you record expenses for a project. So, if installing the software incurred technical and labor costs, list those expenses in September. 

In short, you need to account for all expenses and revenue in the time span you provided a good or service. Accrued revenue stands in for income until that money arrives. 

What is the entry for recording accrued revenue?

You need to record accrued revenue on different financial documents. On your company income statements, list it as earned revenue. Next, accrued revenues will appear on the balance sheet as an adjusting journal entry under current assets. Finally, once the payment comes through, record it in the revenue account as an adjusting entry.

Accrued revenue journal entries: step-by-step guide

Introduction:

Explain why journal entries are necessary for accrued revenue.

Highlight how proper entries help businesses maintain compliance with accounting standards and track financial health accurately.

Step-by-step process:

Create a numbered list of steps to guide readers in recording accrued revenue:

1. Step 1: Tender the service or deliver the product that generates accrued revenue.
2. Step 2: Record a debit to accounts receivable for the earned revenue amount.
3. Step 3: Record a credit to revenue to reflect the earned income.
4. Step 4: Once payment is received, adjust entries by debiting cash and crediting accounts receivable.

Provide a simple and relatable example. For instance:

If a business completes a $5,000 consulting project but receives payment a month later, explain how to record the accrued revenue at project completion and adjust once payment is received.

Recording your accrued revenue in journal entries helps you keep your financial records accurate, follow GAAP rules, and maintain a clear view of your business’s finances. Ultimately, it ensures you record income in the correct period, even if you receive payment later.

So, how do you do this? Let’s go through how to record accrued revenue step-by-step:

• Step 1: Provide the service or deliver the product that generates accrued revenue.
• Step 2: Debit the amount of accrued revenue you earned to accounts receivable. List this information under the current assets section of your balance sheet.
• Step 3: Credit your revenue account with the same amount you debited accounts receivable. This will list your funds as earned revenue on the income statement.
• Step 4: Once you receive the payment, adjust entries by debiting cash and crediting accounts receivable.

Here’s an example of how this process works. Imagine your consulting firm completes a $5,000 project on December 31 but you won't receive payment until January 31.

At the project’s completion on December 31, you record the revenue you earned. The entry below shows the $5,000 as income earned in December, even though you haven’t been paid yet.

• Debit: Accounts receivable ($5,000)
• Credit: Revenue ($5,000)

When you receive the payment on January 31, you update your records to show you’ve been paid. The entry below clears the outstanding amount in accounts receivable and adds the payment to your cash account.

• Debit: Cash ($5,000)
• Credit: Accounts receivable ($5,000)

What are adjusting journal entries? 

Adjusting journal entries are financial records you make at the end of an accounting period to note income and expenses in the period when they occurred. Adjustment for accrued revenues lets you cover items on your balance sheet that otherwise wouldn’t appear until your pay come through. 

Note: Each transaction will appear on the income statement as earned revenue and on the balance sheet as a current asset. Before the adjusting process, you have earned accrued revenue, but not recorded it. 

Types of adjusting journal entries

Accountants use adjusting journal entries for more than accrued revenue. Instead, they have to make balance sheet adjustments for a range of transactions:

• Accrued revenue: Money earned you will receive at a later date
• Accrued expenses: Money owed you will pay at a later date
• Deferred revenue: Payment for a service you have yet to perform 
• Deferred expense: Advance payment for a service or product
• Estimates: Tentative payment that may or may not cover a service
• Depreciation expense: One-time-payment relative to equipment’s drop in value
• Provisions: Money provided in anticipation of future costs

Managing revenue and expense types

Inexperienced accountants can lose track of revenue accrual on a balance sheet. Certain financial statements call it unbilled revenue, and others set it next to other types of income. To help you manage these revenue types, we’ll break them down below. To recap:

• Accrued revenue is an asset.
• You should record it after performing a service.
• It appears on financial statements before the actual payment comes through.

Accrued revenue vs. deferred revenue

You earn deferred revenue when customers pay for a service before you provide it. Accrued revenue uses the reversed process where payment follows a service. So, while you recognize accrued revenue before receiving cash, you recognize deferred revenue afterward. Other differences include:

• Deferred revenue is a liability because you still need to earn it 
• You can spread deferred revenue across multiple entries.

Example: A subscription service uses deferred revenue. Customers pay up-front for months or a year of access to a service. After a transaction goes through, the subscription begins. 

Earned revenue vs. accrued revenue 

Earned revenue refers to the money you get for providing a good or service. Unlike accrued revenue, you make earned revenue right after the transaction ends. Earned revenue is more common in retail and e-commerce. 

• Earned revenue is an asset
• You record it after providing a service, the same time you earn the revenue

Example: Retail storefronts base their business model on earned revenue. When a customer chooses to leave with your product, they pay you at the same time you provide the good. With earned revenue, the monetary transaction and exchange of goods occur at once. 

Unearned revenue vs. accrued revenue 

Unearned revenue and accrued revenue work in opposite ways. You recognize unearned revenue when you receive payment for a service or product you haven’t provided yet. On the flip side, you record accrued revenue when you’ve provided the service but haven’t received payment.

Unearned revenue is a liability because you still owe the service or product to your customer. 

You gradually move this amount from unearned to earned revenue as you fulfill the obligation over time. 

Example: If a customer pays for a one-year magazine subscription upfront, you record the payment as unearned revenue. As they receive an issue each month, you transfer a portion to earned revenue.

Accrued expenses vs. accrued revenue

Similar to accrued revenue, you record accrued expenses after incurring them. Unlike accrued revenue, an accrued expense refers to money a company owes, not income it’s due to receive. For example, purchasing goods from a supplier is an accrued expense until you pay the invoice. 

• Accrued expenses are liabilities 
• You record them upon incurring a charge and pay them later.

Example: Employee wages, bonuses, and commissions also count as accrued expenses. Because wages accrue in the period they occur but reach employees later, they're an accrued expense the company owes. 

Still not quite sure how to manage the different revenue and expense types? Look into payment services to streamline accrual accounting in your business.

Accrued revenues benefits

On the surface, accrued revenue can sound overcomplicated. While it does add extra steps to accounting, the benefits justify your effort. Accrued revenue helps with long-term financial planning and budgeting. Specifically, it provides these benefits:

Functions as an asset (with the potential for interest)

Accrued revenue is a current asset that contributes to your bottom line. While it takes longer to reach, the wait doesn’t make this income less value. Additionally, if you accrued revenue from offering a loan, the accrued interest adds to your total payment. In this case, longer delays before repaying your loan leads to a higher ROI overall. 

Accrued interest = loan principal x daily interest rate x accrual period

For example, assume you lend a friend $100 with a daily interest rate of 5%. In this case, your friend takes a full week to pay you back. So, you’d calculate the accrued interest with 100 x 0.05 x 7. On top of the $100 principal payment, your friend owes you $35 in accrued interest.

Gives a clear picture of your cash flow

Accrued revenue ensures that you record income and expenses all at once. So, you can compare the cost of completing a project with the amount you earned. This complete cash flow projection will show where you can afford to invest and where you should save. It can also reveal your overall financial health. 

Ensures consistency in reporting

Accrued revenue allows for accurate and consistent financial reporting. GAAP enforces the matching and revenue recognition principles across industries. As a result, any good accountant can manage accrued revenue since it's always calculated the same way. 

Groups services rendered in one period

Recording services at the time of payment decouples each transaction from the time you complete each task. Accrued revenue remedies this by grouping all the services you performed around the same time. That way, you can show how much you delivered in a single period.

How QuickBooks tools can simplify accrued revenue accounting

Accounting for accrued revenues takes training and attention to detail. However, accounting for this revenue keeps your business reactive and flexible. Calculating income with expenses in the same period allows you to lay out long-term financial plans. On the whole, this will help you stay ahead of incoming financial changes. 

Simplify your revenue tracking with QuickBooks accounting software. Explore features designed to help you manage accrued revenues, deferred revenues, and more.