Accrued revenue is revenue that has been earned but has not been recorded in the balance sheet at the end of the reporting period. By recording the goods or services received in advance, an entity can ensure that it will have goods and services to sell during a future period, which generates sales revenues.
If this sounds a bit confusing, don't worry. We will explain everything you need to know about accrued revenue in this article and answer some questions, such as what is accrued revenue? What are some examples of accrued revenue? And what’s the difference between accrued and deferred revenue?
Definition
In accounting, accrued revenue is defined as the revenue you have generated for your business that is still owed to you by your customers. This can also be known as Deferred Revenues or Deferred Receipts, but those are just accounting terms. In other words:
Accrued Revenue = Future Cash.
What's an example of accrued revenue?
One simple accrued revenue example would be if you promised to pay your suppliers on the 3 of each month, but you actually pay them on the 10th of the following month. So, you would owe them ten days' worth of interest because they had to wait for their payment. For those ten days, the amount owing would be accrued revenue.
How do you calculate accrued revenue?
When you're a business owner, it's important to understand how to calculate accrued revenue. Accrued revenue is the sum of all revenues that have been earned but not yet received, which means that it's an estimate of how much money your business will make over time.
If you want to know what your company's cash flow looks like, you can calculate accrued revenue with the following formula:
Accrued Revenue = (Revenue Per Period) × (Periods Since Revenue Was Received)
Is accrued revenue the same as accounts receivable?
No, they are not the same. Accrued revenue is what you've done but haven't been paid for yet. Accounts receivable is what you owe to people who have already given you their money in return for services or goods.
So, if you're looking at your balance sheet and see a big difference between accounts receivable and accrued revenue, it would be a good idea to investigate what's going on there.
What is the difference between accrued and deferred revenue?
These terms are often used interchangeably, but they have distinct meanings. Accrued revenue is money that you've earned but haven't received yet. Deferred revenue is money that you've received but haven't yet earned. Consider the following two examples which illustrate this point.
1. Let's say you sell a product on January 1st. You invoice the customer for $100 and deliver the product, but for whatever reason, after two weeks, the customer still hasn’t paid you. This is an example of accrued revenue; you are owed the money but have not yet received it.
2. Deferred revenue then is just the opposite: if someone gives you $100 on January 1st but tells you they don't want their product until March 15th, that's deferred revenue, they've already given you the money, but you haven’t yet earned it.
Conclusion
In conclusion, it's important to understand that there are many terms and methods that relate to purchase order accounting. Accrued Revenue is just one of them, but it can come in handy.
For example, if you plan on issuing an invoice for the month of August, but you haven't received any money yet, you can create a revenue accrual for the month of August by saying that you expect to earn $X by the end of the month.
LiveFlow is an excellent tool that helps companies monitor and maintain their financial health. So, if you’re ready to take the stress out of handling your company’s accounts, then check out LiveFlow today.
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