Accrued revenue is that revenue which has been earned by providing goods and services, but the cash is yet to be received. This revenue is recorded as receivables on the Balance Sheet to show the amount of money the customers owing to the business based on the goods and services purchased.
Accrued revenue is a product of the revenue recognition principle. This requires that the revenue be recorded within the period in which it is earned. This is used in the services industry usually becomes of the contracts for services may extend across many Accounting periods.
For instance, an accrued revenue is recognised when a sales transaction is made and the customers take possession of the goods, regardless of whether the customer paid cash or credit.
In the service industry, accrued revenue appears often in financial statements of the business in the service industry. This is because the revenue recognition would be delayed if the work or service lasted for months. This is directly in contrast to the manufacturing process where invoices would be generated as soon as the products are shipped for delivery.
Without the usage of accrued revenue, revenue and profit would be a lumpy and tedious process.
Company XYZ is a construction company. It has received a project which will take several months to complete. XYZ has to recognise the cost of services that will be employed every month to finish the project. The company cannot wait until the end of the contract to recognise the full contract revenue in the final month.
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Accrued revenue is recorded in financial statements through the use of adjusting journal entry. The Accountant debits an asset account for accrued revenue which is reversed when the amount of revenue is collected.