What Is Accrued Revenue? (With Definition and Examples)
By Indeed Editorial Team
Published June 10, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Companies use several accounting methods to track their expenses and revenues. Accrual accounting is one such method that can help a company record its expenses and income even if customers delay payments for the products or services they ordered. Learning about this type of revenue in accounting can support career development as a financial professional and help a company better balance its accounts. In this article, we define accrued revenue, outline industries that use it, discuss why it's important, and provide several practical examples.
What is accrued revenue?
Accrued revenue, or unbilled revenue, refers to the earnings obtained by providing a good or service for which a seller doesn't immediately receive payments. Companies usually record this revenue as receivables on their balance sheets and receive payments in the future. These revenues are assets to a company, and they reflect the amount customers owe the business. For example, if a logistics company requests a service and pays after three months, the seller can record the accrued amount in their financial statements.
Companies use this type of revenue in accrual accounting, where they record the time and details of sales without yet receiving payment. Accrual accounting typically comprises two principles:
Revenue recognition principle: This principle requires companies to record revenue transactions in the same accounting period they earn it, rather than wait until they receive payment for the product or service.
Matching principle: This principle follows an accounting concept that seeks to connect revenue generated to the expenses incurred to generate that revenue in the same accounting period.
What industries use unbilled revenue?
Unbilled revenue is common in service industries, where contracts may extend for long durations. The service industry uses it often because otherwise, they may delay revenue recognition until the work or service finishes. The assigned task may take several months to complete, and they delay payments until the end of the project or on the designated milestone billing dates. If the company doesn't recognize these revenues in its financial statements early, business data loss, incorrect balances, or financial disagreements may occur.
In comparison, it's less common in manufacturing companies as they issue invoices immediately after shipping a product or contracting a service. For instance, a construction company can work on a project for several months. They can recognize part of the revenue for that contract to pay for services monthly or weekly, unlike service industries that wait till the end of a project to acknowledge total payments.
Why is unbilled revenue important?
Unbilled revenue is essential because organizations use this accounting concept to match revenues with expenses. Recording unbilled revenues can help facilitate accurate revenue reports and increase the company's profit levels by accounting every month. It can also help identify potential problems in advance and allow the company to prepare possible countermeasures or develop strategies to resolve the concerns. Unbilled revenue can demonstrate how a business can achieve long-term success. It can also help you understand how business sales can contribute to a company's profitability and long-term growth.
Accrued vs. deferred revenue
Deferred revenue is the opposite of accrued, where customers pay in advance for a product or service not yet provided. For example, suppose a company and its business partner establish a mutually beneficial relationship. The business partner may pay for a product or service before they receive their request from the company. In deferred revenue situations, the company records the receivable payment as a liability and then converts it to an entry once they complete the transaction. The major difference is that companies recognize deferred revenues after receiving payment and unbilled revenue before receiving payment.
Examples of unbilled revenue
Here are typical examples of how accrued revenue can occur in practical business situations:
Example for loans
When a bank or company loans funds to another company or individual, it accrues interest on the capital throughout the loan period. They make payments at specific times, so the company can record unbilled revenue monthly or quarterly even if they receive the interest income only once a year. See the following example to understand better how this concept works with loans:
Violet Company requests a loan of $60,000 from Matt Loans Co. with an interest rate of 6%. They also agree to a one-year loan, and Violet Company is to pay the total interest and the principal at the year's end. Matt Loans Co. records the sum of $300 interest every month in revenue on the income statement and recognizes it as an asset on the balance sheet, even though no payment occurred yet. Matt Loans Co. recovers the total interest of $3,600 from Violet Company and the principal and debits the accounts on the balance sheet at the year's end.
Example for long-term projects
Unbilled revenue can occur when a company works on a long-term project. The company can book revenue according to the percentage of completion method. This can allow the company to gradually recognize its revenue for providing a service or delivering a product. Companies can determine the total revenue margin for a project and recognize it per completed project unit. Here's an example of unbilled revenue for a long-term renovation project:
Green Foods Inc. is a well-known restaurant chain in the food industry. They plan to renovate all their restaurant branches and subsidiaries, so they hire Parkview Interior Design Company to handle the renovation. Green Foods Inc. requests Parkview Company to complete the project within four years and bill them once every year. Parkview can accrue the revenue or expenses relative to each restaurant every month, recognize it as an asset on their income statement, and record the bills to send to Green Foods Inc. at the end of each year.
Example for milestones
Companies can book revenues according to milestones if they're working on an order that has multiple deliverables. Companies can use this method to record revenues at specific project milestones rather than accrue revenue each time they incur an expense. Here's an example of unbilled revenue for a consulting project with milestones:
Heritage Company Ltd. is a popular aeroplane manufacturer that produces airplanes on bulk orders. It has an ongoing consulting project with BeLife Airways, a rising airline service in the industry. They agree that Heritage Company Ltd. is to produce six new airplanes for BeLife Airways in three years. The agreement also states that Heritage builds two planes as a milestone and only bills BeLife Airways once a year. According to the agreement terms, Heritage accrues revenue for two airplanes as the milestone and receives the payment at the end of each year after delivering the airplanes.
Example for SaaS
Accrued revenue can benefit Software as a Service (SaaS) companies, especially those that bill customers based on subscription packages. They can accrue revenue in cases of upgrades, downgrades, add-on purchases in a subscription period, or one-time charges like set-up fees. Here's an example of how a SaaS company can accrue revenue:
Recolte Company uses TechPro Automation software to automate their business processes and pay for the subscription monthly. If the Recolte company hires new employees in a month, they can pay TechPro for further training sessions and new software users. Techpro accrues revenue each day for the new purchases instantly and bills Recolte company for the services from the start of the following month.
Example for rent
It can also benefit real estate companies and agents to record their accrued monthly or annual revenue. Landlords can book unbilled revenue to record their tenant's rent payment from the first day of the month but receive payment at month-end. Here's an example of unbilled revenue for a company renting office space:
Potter Logistics Company is a startup offering delivery services to customers. They need an office space to operate daily business activities and decide to rent one from Black Agency Inc. This real estate company manages and prepares buildings for rent, lease, or sale. Potter Logistics found an office space from Black Agency's catalogue and decided to rent the place. The agency accrues revenue for the site every month and records it as an asset or receivable in its financial statement. They send the bills to Potter Logistics at the year's end to receive payment and balance their financial documents.
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