Accrued Revenue

Accrued revenue is income that a business has earned by delivering goods or performing services during a period but has not yet invoiced or collected by the end of that period. Under accrual accounting the income is recognised when it is earned, so the company records it in the income statement and carries a matching asset on the balance sheet until a bill goes out. Common examples are interest earned on a deposit or loan between payment dates, consulting hours worked but not yet billed, and utility or telecom usage measured before the billing cycle closes.

Accrued revenue is the mirror image of deferred revenue, where cash arrives before the work is done. Its counterpart on the cost side is the accrued expense. Once an invoice is issued, accrued revenue is reclassified as accounts receivable. The timing rules come from revenue recognition standards, chiefly IFRS 15 and the US ASC 606.

Think of a babysitter who looks after a neighbour's children every afternoon and sends one bill on the first day of each month. On 31 March she has already done a full month of work, and she knows she is owed for it, even though the bill has not gone out and no money has arrived.

If she wanted an honest picture of how her business did in March, she would count that month's pay as March income, not as April income just because April is when she asks for it. Accrued revenue is the accounting entry that lets a company do exactly that: count what it has earned in the month it earned it, and keep a note that the money is still to come.

At the end of the period the accountant makes an adjusting journal entry, usually as part of the month-end close:

1. Accrual. Debit accrued revenue (an asset, sometimes called unbilled receivables), credit revenue.
2. Invoicing. When the bill is issued, debit accounts receivable and credit accrued revenue, which moves the balance into ordinary receivables without changing income.
3. Collection. When the customer pays, debit cash and credit accounts receivable.

Many companies post the accrual as an automatic reversing entry on the first day of the next period, so that the real invoice can be booked in full without double-counting. Under cash accounting, used by many small businesses, none of these entries arise, because income is recorded only when cash is received.

Interest is the most common accrued revenue for banks and treasury departments. The amount earned but not yet received is calculated as:

• $P$ is the principal of the deposit or loan.
• $r$ is the annual interest rate, written as a decimal.
• $d$ is the number of days since the last interest payment date.

A company holds a $2,000,000 deposit paying 4.5% a year, with interest paid quarterly and most recently on 15 October. At the 31 December year end, 77 days have passed since that payment. Accrued interest is $2{,}000{,}000 \times 0.045 \times 77 \div 365 \approx 18{,}986$, so the company records about $18,986 of interest income and an accrued interest asset of the same amount. Bond markets use the same idea when buyers pay sellers accrued interest on top of the quoted price; the day-count convention (365, 360 or actual/actual) varies by market.

Modern revenue standards split unbilled amounts into two kinds. If the company's right to payment is unconditional except for the passage of time, the amount is a receivable even before an invoice is sent. If the right depends on something else, such as finishing the next milestone of a project, it is a contract asset. In practice "accrued revenue" in many charts of accounts covers both. Contract assets are tested for impairment in the same way as other receivables, using expected credit loss rules under IFRS 9.

Because accrued revenue is booked before a customer has seen a bill, it relies on estimates and is a classic area for errors and for earnings manipulation. Auditors check that the work was actually performed, that the amounts reverse into real invoices, and that balances are not growing faster than sales. A rising stock of unbilled revenue ties up working capital and inflates days sales outstanding if analysts include it. Revenue accrued but never billed has to be reversed, which reduces net income in a later period. For this reason analysts often compare reported earnings with the statement of cash flows to see how much income has turned into cash.

• IFRS Foundation
• Financial Accounting Standards Board