When we begin to talk about "accrued" items in relation to accounting transactions, we begin to go further into the reporting side of accounting, and in order to keep this article as simple as possible, we're not going to expand on the relationship of accrued items to balance sheets, profit and loss sheets, etc. We're simply going to define what accrued revenue is, and how you would record such a transaction.
Accrued revenue refers to revenue that has been incurred but not yet received. Examples of accrued revenue items might be services you have provided but that have not yet been billed or paid for. The service industries account for a large number of accrued revenue transactions, since quite often services are provided over a week, month, or even year, but aren't billed until the job is complete.
One of the most basic concepts of accounting involves determining if an item is an asset or a liability. Accrued revenues are assets that unless properly accounted for, will not provide an accurate picture on the balance sheet for a business.
Why does that matter? Well, suppose you're Company B, and most of your work is service industry work. You would like to expand your company's range of services and work radius, but when you approach the bank, your assets and equipment value is not enough to use as capital for a loan. You know the business is there, and that you have clients who have not yet paid you, but how do you put this onto paper so that a lending institution can account for that revenue? Those transactions must be recorded as accrued revenue, and shown on your assets listing as such.
When you go beyond the need to show such information for lending institutions, why would you need to record and document accrued revenue? What about construction companies that are bidding and working on big construction jobs? How would they account for the expense of materials and labor, if they didn't also account for any unpaid, or accrued revenue for the job? Their books would be in a tremendous state of imbalance if there was not method for recording the income that is as yet unseen.
Although not all accounting systems utilize deferred and accrued recording of expenses and income, many of the larger businesses and corporations in existence today, must include these in their transactions and records. These entries are most often known as "adjusting entries" since they are usually completed during the end of an accounting cycle, usually on a monthly basis. These entries, are not necessarily the permanent status of a situation, and therefore are referred to as "adjusting" simply because next month, they will be adjusted to reflect any changes in the status of income and expense as it relates to a particular situation. For instance, the say Company B bills a client during the month, and the accrued revenue figure is reduced by that amount; next month, accrued revenue in the adjusting entries, must reflect the billing and subsequent collection. The status of accrued revenue has changed.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.