Accrued revenue is revenue which has been earned by a business for goods and services provided to a customer but which has not yet been invoiced to the customer.
Suppose a business has a contract worth with a customer to provide a service which is to be invoiced quarterly in arrears. The contract is worth 12,000 for the full quarter and the service is provided continuously throughout the quarter.
At the end of the first month, the business will have earned one third of the amount (4,000) which has not been reflected in the accounting records. To correct this situation an adjusting entry is made using an accrued revenue journal entry.
Accrued Revenue Journal Entry
The accrued revenue adjusting entry is shown in the accounting records using the following bookkeeping entries:
|Accrued service revenue||4,000|
Accrued Revenue Bookkeeping Explained
The debit entry represents an asset in the balance sheet and reflects the amount owed by the customer for services provided and earned to date under the contract.
The credit entry is to the revenue account in the income statement and represents the income earned to date.
The Accounting Equation
The Accounting Equation, Assets = Liabilities + Capital means that the total assets of the business are always equal to the total liabilities of the business This is true at any time and applies to each transaction. For this transaction the Accounting equation is shown in the following table.
With the accrued service revenue journal entry, the asset (accrued revenue) is increased by 4,000 representing an amount owed by the customer for services provided during the month. On the other side of the equation, the additional revenue increases the net income and retained earnings of the business resulting in an increase in the owners equity in the business.
Note: Accrued revenue should not be confused with deferred revenue. Accrued revenue is revenue earned but not yet invoiced, whereas deferred revenue is revenue received but not yet earned.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.