Accrued revenue is a term used in accounting to describe the revenue that a company has earned, but has not yet received payment for. This is the opposite of deferred revenue. This can happen when a company provides a service or sells a product, but the customer has not yet paid for it. In this case, the revenue is considered to be “accrued” because it is the result of the company’s efforts, but has not yet been received in the form of cash.
Why accrued revenue is important
Accrued revenue is important because it represents an asset for the company. This means that the company has a right to receive payment for the goods or services that it has provided, and this right can be converted into cash in the future. As a result, accrued revenue is typically recorded on a company’s balance sheet as a current asset.
One common example of accrued revenue is when a software company charges at the end of a licence term. As an example, if an IT security company invoices at the end of the quarter but recognises revenue every month during the quarter, they will have accrued revenue during the three-month period.
Accounting for accrued revenue
The core concept behind accrued revenue is that revenue should be recognised as it is earned. This allows a company to understand sales trends and profitability. Sadly, the accounting for accrued revenue is complex. Most smaller companies using Xero or QuickBooks resort to lengthy spreadsheets to track all revenue.
These spreadsheets quickly become unwieldy as companies create new product lines, gain customers traction, even issue credit notes. Updating spreadsheets, to ensure correct revenue recognition, takes days each month. Occasional errors are inevitable.
Automating revenue recognition
Several software packages, including ScaleXP, have eliminated the need for spreadsheet tracking by automating accrued revenue recognition, making it much easier for financial teams to close the month quickly and improve accuracy.
To sum up, accrued revenue is a term used to describe the revenue that a company has earned but has not yet invoiced or received payment for. This revenue is considered to be an asset for the company, and is typically recorded on the balance sheet as a current asset. Understanding how to properly account for accrued revenue is important for companies to accurately track and report their financial performance.