What is accrued revenue?
Accrued revenue is business income that has been earned but not yet collected. In other words, the business has delivered goods, services, or a loan, but the customer has not yet paid.
Many larger businesses use the accrual method of accounting; revenue and costs get recorded when they occur, regardless of when the money comes through. Businesses must accurately record accrued revenue to ensure they have enough cash to cover expenses.
The accrual method of accounting is more complex than its alternative, the cash method. Accounting software can help companies master the intricacies of the accrual method and accurately track revenue, costs, and profitability.
Types of accrued revenue
When accountants balance a business’s books, accrued revenue falls into the “asset” column. Since a customer owes the company money it still counts as income. Specifically, accrued revenue lands in one of the following two categories:
- Accounts receivable: This is the amount of money a company is owed for goods or services rendered. Accrued revenue is common in the service industry, where businesses might wait until they meet certain milestones or complete a project to bill customers. Businesses often use accounts receivable automation software to optimize this method of payment.
- Interest revenue: This is the amount of interest on a loan owed to a company. For example, interest might grow each day, but the payment isn't due until the end of the month. In the meantime, the amount is considered accrued interest revenue.
Importance of accrued revenue
Monitoring accrued revenue is vital for painting an accurate picture of financial well-being. By recording and analyzing this indicator, companies can:
- Understand profit margins. Without accounting for accrued revenue, a company might seem to be losing money. For example, a design firm completes and invoices a $10,000 project in June, but payment isn’t due until the following month. Without that income recorded, the company might appear to have spent more money than it earned in June.
- Accurately forecast. By capturing revenue as it’s earned, companies always have a real-time snapshot of their profit. They can look at trends and use budgeting and forecasting software to plan for the future as soon as possible.
- Attract investors. When considering funding a business, investors look for the most accurate financial statements. Many investors prefer seeing balance sheets using the accrual accounting method to understand the company’s true earnings better.
Accrued revenue is also a key metric in the accrual accounting method, which many small and most medium-to-large businesses use. Publicly-held companies are required to use this method, as are those with over $5 million in annual sales or those maintaining inventory with over $1 million in annual sales.
Accrued revenue vs. deferred revenue
Accrued revenue is often mistaken for deferred (or unearned) revenue because of their similar-sounding names, but they each have different meanings.
Accrued revenue indicates that payment comes later than the delivery of goods or services. Deferred revenue means that the company receives payment before delivering goods or services.
Accrued revenue is considered an asset on a company’s balance sheet. Deferred revenue is recorded as a liability. The goods or services have not been delivered, so the customer could still ask for a full or partial refund.
by Mara Calvello
