Accrued Revenue

Accrued revenue is revenue a business has earned in a period by delivering goods or rendering services and has not yet billed or collected. The earned amount is carried as an asset until the invoice goes out and the cash arrives, and in the ordinary case it is a current asset. Nothing about it is a liability: the business is owed, it does not owe.

Is Accrued Revenue an Asset or a Liability?

An asset, every time. The business is owed for work it has already delivered, and an asset is a present right of an entity to an economic benefit (FASB Concepts Statement No. 8, Chapter 4, paragraph E16). The right exists at the reporting date whether or not anyone has raised the paperwork that will collect it.

Is Accrued Revenue a Current Asset?

Usually, yes. The term current assets designates cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business (ARB No. 43, Chapter 3A, paragraph 4). Unbilled service work clears that test easily, because the invoice and the collection both fall inside the cycle.

The classification follows the cycle rather than a flat twelve months, so an amount earned under a contract that will not be billed or collected inside that cycle is not current. Where the cycle test bites, and what else the class takes in, is set out in current assets.

The Journal Entry for Accrued Revenue

Debit the accrued revenue asset, credit the revenue account, for the amount the period earned. It is an adjusting entry posted at period end, after the ordinary transactions of the period are recorded and before the statements come out, and it belongs to the wider set of entries described in accruals.

The balance then comes off one of two ways once the invoice is raised. Reverse the accrual at the start of the next period, and the invoice can be posted in full, debiting accounts receivable and crediting revenue, without anyone checking what is already sitting in the ledger. Leave the accrual standing instead, and the invoice is posted as a debit to accounts receivable and a credit against the accrued revenue balance, with only the difference between the estimate and the final amount reaching revenue.

A Worked Example

Say a firm finishes an advisory engagement in the last week of May and does not release the invoice until the first week of June. It accrues its best estimate of the fee earned at the May close, reverses that entry at the start of June, and posts the invoice when it goes out.

May 31, work delivered and not yet billed
  Debit   Accrued revenue (asset)          18,750
  Credit  Advisory revenue                          18,750

June 1, reversing entry
  Debit   Advisory revenue                 18,750
  Credit  Accrued revenue (asset)                   18,750

June, invoice raised
  Debit   Accounts receivable              19,400
  Credit  Advisory revenue                          19,400

Advisory revenue left in June    19,400 - 18,750  =    650

May carries the estimate, June carries only the amount by which the invoice exceeded it, and the two months together carry the fee in full. Had the accrual been left standing rather than reversed, the arithmetic would land in the same place: the invoice clears the asset and only the difference reaches revenue in June.

What Accrued Revenue Is Not

Deferred Revenue

Accrued revenue is work done ahead of the cash, and deferred revenue is cash taken ahead of the work, which is why one is an asset and the other a liability. Both directions of the deferral are set out in deferral.

Accounts Receivable

The line between them is the right to payment rather than the invoice: while the right to payment still depends on something more than the passage of time, the earned amount is not yet a receivable, and once that right is unconditional it is one whether or not a bill has gone out. That test, and what the earned amount is presented as before it is met, is worked through in accounts receivable.

Accrued Interest

Accrued interest sits on the same side of the balance sheet when a business is the lender, but it is built on money lent across time rather than on work delivered, and its day-count math is set out in accrued interest.

Where Accrued Revenue Sits in a Firm’s Own Close

A CPA firm meets this balance on its own books before it meets it on a client’s. Time is worked in one month and billed in another, so a period end almost always closes on delivered work with no invoice behind it, and on accrual-basis books that unbilled time is the firm’s own accrued revenue. The amount is an estimate at that point, because what will actually be billed is settled when a partner releases the work, so the accrual carries the firm’s own view of what the time is worth rather than the standard-rate value of every hour logged. Why that lag stays invisible to the usual collection measures is set out in arrears billing.

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own period-end accrual and work in progress schedules through a trial task before anything client facing depends on it.