How Do You Record Adjustments for Accrued Revenue?

When it comes to operating a business, some of the most important metrics to track include the amount of revenue coming through the door, and whether that’s sufficient to pay for the various costs incurred through operating the business.

While revenue is easy to think about as “automatic” when the sale of a good or exchange of service happens, in reality, revenue is not always as liquid as it seems. Only when revenue is received in the form of an immediate cash payment does it truly qualify as revenue.

Instead, accrued revenues are more likely for a business, especially when it comes to accounting best practices. Typically, an accountant will record adjustments for accrued revenues through debit and credit journal entries in defined accounting periods. This helps account for accrued revenues accurately so that the balance sheet remains in balance.

Key Takeaways

• Accrued revenue is revenue that has been earned but not yet received. It is recorded on the balance sheet as a current asset.
• Net payment terms with clients create accrued revenue, where an item can be bought but payment can be made at a later date.
• Adjustments to accrued revenue help keep financial statements balanced by tracking cash and recognizing revenue when it is received.

What Is Accrued Revenue?

Accrued revenue refers to a company’s revenue that has been earned through a sale that has already occurred, but the cash has not yet been received from the paying customer.

Accrued revenue normally arises when a company offers net payment terms to its clients or consumers. In this scenario, if a company offers net-30 payment terms to all of its clients, a client can decide to purchase an item on April 1; however, they would not be required to pay for the item until May 1.

For example, if the item costs $100, for the entire month of April, the company would record accrued revenue of $100. Then, when May 1 rolls around and the payment is received, the company would then create an adjusting entry of $100 to account for the payment.

On the flip side, the company purchasing the good or service will record the transaction as an accrued expense under the liability section on the balance sheet.

Note

Under cash accounting, revenue is recorded only when payment is received.

How Are Adjustments Recorded for Accrued Revenue?

When accrued revenue is initially recorded, the amount of accrued revenue is recognized on the income statement as revenue, and an associated accrued revenue account on the company’s balance sheet is debited by the same amount.

When payment is due, and the customer makes the payment, an accountant for that company would record an adjustment to accrued revenue.

The accountant would make an adjusting journal entry in which the amount of cash received by the customer would be debited to the cash account on the balance sheet, and the same amount of cash received would be credited to the accrued revenue account or accounts receivable account, reducing that account.

This standard practice keeps the balance sheet in balance, tracks the correct amount of revenue accrued, tracks the correct amount of cash received, and does not change the revenue recognized on the income statement.

What Is Accrual Accounting and Example?

Accrual accounting is a method of recording revenues and expenses. Under this method, both revenues and expenses are recorded when they are incurred. For example, if a company sells $500 in goods, but won’t receive the payment till a month later, it will record $500 in revenue in the top line of the income statement and a corresponding entry on the balance sheet.

Is Accrual Accounting Better or Cash Accounting?

Whether accrual or cash accounting is better will depend on the specific company. While cash accounting is simpler to use, accrual accounting is a more accurate picture of a company’s operations. Smaller businesses are generally better served using cash accounting, while larger businesses are better served using accrual accounting, especially since it complies with generally accepted accounting principles (GAAP) and is required for publicly traded companies.

What Is the Difference Between Accrued Expenses and Accounts Payable?

Accrued expenses are costs incurred by a company but not yet paid. This can include utilities, wages, and other bills. Accounts payable are obligations for goods and services received but not yet paid. These are most often goods and services received from suppliers that are invoiced. Both accrued expenses and accounts payable are liabilities.

The Bottom Line

Under the accrual method of accounting, revenue is recorded when it is earned, regardless of if cash has been received. Companies must track and adjust accrued revenue when payments are made to accurately reflect financial statements and business operations. This accuracy is important for investors, analysts, and other stakeholders to understand a company’s financial health.