What it means
Not every sale ends with an invoice on the same day. A consultancy may work for three months before sending a bill, or a contractor may complete a stage of a project that is billed upon sign-off.
The work has been done and revenue has been earned, so the business records it even without an invoice. The entry increases an asset, often called accrued income or a contract asset, and increases revenue.
When the invoice is later issued, the asset is replaced by accounts receivable, and when the customer pays, the receivable becomes cash. No extra revenue is recorded at those later steps, which avoids counting the sale twice.
Accrued revenue differs from deferred revenue, which is the opposite situation. With deferred revenue the customer has paid before the work is done, so the business owes the service and records a liability.
With accrued revenue the work is done before payment or billing, so the customer owes the business and the business records an asset. Accountants should be careful, because revenue should only be accrued when the business has a right to payment.
Optimistic estimates of progress can push revenue forward and flatter results, which is a common area of audit scrutiny. Evidence such as signed contracts, timesheets and milestones supports the figure.
Accrued revenue can also matter for cash planning. A growing balance can mean the business is working hard but waiting to invoice, so it is financing its own customers.
Finance teams monitor it so that billing keeps pace with delivery. Software companies and other subscription businesses see a related pattern.
When a customer is billed monthly in arrears for usage, the company must estimate usage between the last meter reading and the period end. Good systems pull that data automatically so the accrual is not a guess.
In practice
Real-world examples
Example 1
A law firm works on a case for two months before sending its monthly bill. At the month end, it estimates the unbilled work from timesheets and records it as accrued revenue. The bill goes out early next month, and the accrual is cleared when the invoice is posted.
Example 2
A solar installer completes 70% of a large installation by quarter end but invoices only on final handover. It accrues the revenue for the work completed. The accounts reflect the progress made, not just the invoices issued, so the quarter's profit is not understated.
Example 3
A bank holds a loan to a customer and earns interest each day. Interest earned between the last payment and the month end is recorded as accrued income at the reporting date. The money arrives on the next payment date, when the accrued amount is cleared.
Think of it
Accrued revenue is like completing a job for a neighbor and waiting for them to pay you. You've earned the money; you just haven't received it yet.
Formula
Calculation
Accrued revenue = Revenue earned to date - Amount invoiced to date
A software developer signs a $120,000 contract for a six-month project, billed on completion of each stage. After four months, the work completed is worth 4/6 x $120,000 = $80,000, and the developer has invoiced $60,000. Accrued revenue = $80,000 - $60,000 = $20,000. The developer records a $20,000 asset and $20,000 of revenue for the period.Case study
Seen in the real world
Summit Engineering is a fictional design firm that, in this illustrative story, took on a $300,000 project billed in a single invoice upon delivery. The project ran for nine months, straddling two financial years, and the work in the first year was 50% complete.
The firm's first draft of the accounts showed no revenue from the project in the first year because no invoice had been sent. The finance manager pointed out that half of the work was done, and that $150,000 should be recognised as accrued revenue with the related costs.
With the correction, profit in the first year rose by the margin on $150,000 of work, and profit in the second year was no longer inflated by revenue that belonged to the first. The directors could now compare the two years fairly and see how the project was progressing. They also agreed to bill in stages on future contracts to ease the cash pressure.
Watch out
Common mistakes
- Accruing revenue before the business has earned the right to be paid. Revenue should reflect work actually completed.
- Forgetting to reverse accrued revenue when the invoice is issued. This causes the sale to be counted twice.
- Confusing accrued revenue with deferred revenue. One is an asset for work done but unbilled, the other is a liability for cash received but work not done.
Questions
People also ask
Is accrued revenue the same as accounts receivable?
No. Accrued revenue has not been invoiced yet, whereas accounts receivable represents invoices issued but unpaid.
Where does accrued revenue appear on the balance sheet?
It is shown as a current asset, often labelled accrued income or contract asset. It converts into a receivable once billed.
How is accrued revenue measured?
It is based on work completed, using milestones, time spent or the percentage of completion. The method should match the contract terms and be applied consistently, with evidence kept for the auditors.
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