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Short Storyline
Imagine you’re a freelance designer who completed a project in December but won’t receive payment until January. Should you wait to record this income? Or should it be accounted for in December, when the work was done? 🤔
This is where accrued revenue comes in—it ensures that income is recorded when earned, not when cash is received. Let’s break it down step by step!
What is Accrued Revenue?
Accrued revenue is income that has been earned but not yet received by the end of an accounting period. It follows the accrual basis of accounting, ensuring revenue is recognized in the period it is earned, not when the cash is received.
Examples of Accrued Revenue
- Consulting services provided but not yet billed
- Interest income on loans that has accumulated but is unpaid
- Software subscriptions recognized monthly but billed quarterly
- Rent income earned by a landlord but yet to be received
Key Features of Accrued Revenue
✅ Revenue is earned before cash is received
✅ Recorded as an asset (accounts receivable)
✅ Ensures accurate financial reporting
Comparison: Accrued Revenue vs. Deferred Revenue
| Feature | Accrued Revenue | Deferred Revenue |
| Cash Received? | No (earned but unpaid) | Yes (received in advance) |
| Recorded As | Asset (Receivable) | Liability (Unearned Revenue) |
| Revenue Recognition | Before cash is received | After service is provided |
| Example | Interest income earned but unpaid | Gym membership paid in advance |
What is the Journal Entry for Accrued Revenue?
When Revenue is Earned But Not Yet Received
When a company earns revenue but hasn’t received payment, it records an accrued revenue asset.
Example: A company provides consulting services worth ₹50,000 in December but will receive payment in January.
Journal Entry (December – Revenue Earned but Unpaid)
Debit: Accounts Receivable ₹50,000 (Asset created)
Credit: Revenue ₹50,000 (Revenue recognized)
Narration: “Recognized ₹50,000 as revenue for consulting services provided but not yet paid.”
When Payment is Received in the Next Period
Once the client pays in January, the receivable is cleared.
Journal Entry (January – Cash Received)
Debit: Cash/Bank ₹50,000 (Cash received)
Credit: Accounts Receivable ₹50,000 (Receivable settled)
Narration: “Received ₹50,000 payment for consulting services rendered in December.”
Real-Life Example
A company invests ₹1,00,000 in bonds that earn 5% annual interest. The company earns interest monthly, but payments are made quarterly.
Accrued Interest in Month 1 (January, Unpaid)
Debit: Interest Receivable ₹5,000
Credit: Interest Income ₹5,000
When Interest is Paid at the End of Quarter (March)
Debit: Cash/Bank ₹15,000
Credit: Interest Receivable ₹15,000
This ensures that revenue is recorded as earned, even before receiving payment.
Why is Accrued Revenue Important?
✅ Ensures accurate revenue reporting
✅ Prevents understating income in financial statements
✅ Improves financial decision-making
Placement in Financial Statements
Balance Sheet (Before Receiving Payment)
Accrued revenue appears under Current Assets as Accounts Receivable.
Balance Sheet
————————————–
Credit (Cr) | Debit (Dr)
————————————–
Assets |
– Current Assets |
Accounts Receivable ₹50,000 |
————————————–
Profit & Loss Statement (When Revenue is Recognized)
When revenue is recorded, it moves to the Profit & Loss (P&L) Statement under Revenue.
Profit & Loss Statement
————————————–
Credit (Cr) | Debit (Dr)
————————————–
Revenue |
– Consulting Income ₹50,000 |
————————————–
How to Calculate Accrued Revenue?
Formula:
Accrued Revenue = Revenue Earned – Revenue Received
Example Calculation:
- A company earns ₹12,000 per month for consulting but invoices quarterly.
- By the end of two months, ₹24,000 is earned but not yet received.
- Accrued Revenue = ₹24,000 – ₹0 = ₹24,000
Life Cycle of Accrued Revenue
Steps Overview:
- Revenue Earned – Company provides goods/services but hasn’t been paid.
- Recognizing Revenue – Record as Accounts Receivable (Asset).
- Payment Received – Convert receivable to cash.
- Completion – No more outstanding receivables.
Detailed Steps & Journal Entries:
1. Revenue Earned But Not Received
Debit: Accounts Receivable ₹10,000
Credit: Revenue ₹10,000
2. When Cash is Received
Debit: Cash/Bank ₹10,000
Credit: Accounts Receivable ₹10,000
At this point, the Accounts Receivable balance is zero.
Real-Life Practices: Reversal vs. Non-Reversal
✅ Reversal Approach: Ensures clean financial records for the next period.
❌ Non-Reversal: Could cause reporting issues and inflated receivables.
Common Mistakes to Avoid
🚫 Not recording revenue in the correct period.
🚫 Misclassifying accrued revenue as deferred revenue.
🚫 Forgetting to reverse accruals after payment.
Relevant Accounting Standards (GAAP, IFRS, IAS)
- IFRS 15 – Revenue from Contracts with Customers
- IAS 1 – Presentation of Financial Statements
- US GAAP (ASC 606) – Revenue Recognition
For more details, check GAAP vs. IFRS Differences.
FAQs
1. Accrued Revenue: Asset or Liability?
✅ Asset – Represents money owed to the company.
2. Accrued Revenue in Profit & Loss Account?
Recorded under Revenue once earned, even before receiving cash.
3. Accrued Revenue: Which Type of Account?
✅ Current Asset on the Balance Sheet.
4. How Does Accrued Revenue Affect Financial Statements?
- Increases assets (Accounts Receivable).
- Increases revenue in the P&L.
5. Difference Between Accrued and Deferred Revenue?
| Feature | Accrued Revenue | Deferred Revenue |
| Cash Received? | No (revenue earned, payment pending) | Yes (cash received, revenue unearned) |
| Recorded As | Asset (Receivable) | Liability (Unearned Revenue) |
Conclusion
Understanding accrued revenue ensures accurate income reporting and better cash flow forecasting. Whether it’s consulting fees, interest income, or rent, recognizing revenue when earned leads to transparent financials.