Introduction to Accrued Revenue
Accrued revenue refers to a sale that a seller has recognised, but he has not billed the sale to his customer. The companies that will delay their revenue recognition unreasonably if they do not use the accrued revenue concept will implement it. Revenue recognition is crucial in every business; hence, if you are not sure of how you should do it, you should hire an accounting firm Johor Bahru and get assistance from the professionals.
In the service industries, accrued revenue is quite common, as they may delay the billings for a few months until a project has ended, or until they reach a particular milestone billing date. However, this is not something common in the manufacturing companies because they will typically issue the invoice once they have delivered the products.
The accrued revenue concept is necessary as it enables the companies to match their revenue with expenses appropriately when doing financial accounting (Also see How do You Distinguish Financial Accounting and Management Accounting?). Without accrued revenue, the initial level of revenue and profits of these companies will be excessively low. This does not portray the real condition of the business. Besides, if a company does not use accrued revenue, its revenue and profit recognition will be much lumpier, as it will only record the revenues at long intervals when it issues the invoice.
For you to record the sales in a particular accounting period, you should create a journal entry and document those sales as accrued revenue.
As an instance, XYZ consulting firm has engaged in a consulting project with a big customer and the project worth RM200,000. The consulting agreement has shown that there are two milestones, and after each milestone, the customer owes XYZ consulting firm RM100,000. According to the agreement, XYZ consulting firm can only bill the customer for RM200,000 when the project has ended. Thus, to record the first milestone, XYZ consulting firm should create the accounting double entry as follows:
– Debit accrued billings for RM100,000
– Credit consulting revenue for RM100,000
After three months, XYZ consulting firm has completed the second milestone, and they will bill the customer for RM200,000. Hence, it should create an entry to reverse the initial accrual and create another entry to record the RM200,000 invoice.
– Debit consulting revenue for RM100,000
– Credit accrued billings for RM100,000
– Debit accounts receivable for RM200,000
– Credit consulting revenue for RM200,000
Companies that use cash basis accounting (Also see How to Boost Your Cash Flow) will not record accrued revenue as they will only record the revenue when they receive cash from customers.
In some cases, the reverse of accrued revenue may arise. Such a situation is also known as deferred revenue. This indicates that the customer has paid the seller in advance, yet the seller has not delivered the products or provided the services. Under such circumstances, the seller may record the payment they received as a liability initially before converting the entry into sales when they have completed the transaction.