Accrued Revenue
Accrued revenue is the amount of revenue that is earned but not yet billed to the client. Revenue is accrued in order to properly match revenue with expenses. It normally arises in case of sales that occur over a period of time and/or where the issue of invoice is delayed.
Accrued revenue is also referred to as unbilled revenue. The concept of accrued revenue is opposite to unearned revenue (also called deferred revenue) in which cash is received before the products giving rise to the revenue are transferred.
Following are few of the examples in which revenue is accrued.
- A professional association that allows payment of membership fees in arrears records accrued revenue, which increases as the payment date approaches.
- Revenue is accrued on a construction contract according to the percentage of completion method when the contract price is billed at the end of the contract.
- A building maintenance company accrues revenue over the period of maintenance contract.
- An equipment leasing company accrues revenue over the lease term if it bills the lease receivable at the end of the contract.
Example
M & A Solutions (MAS) provides corporate finance and investment banking services. On 1 January 2014, government of a South Asian country hired it to provide financial advice related to privatization of state entities. Under the contract, the firm had to do a preliminary review of government-owned entities and come up with a list of four ideal candidates for privatization by end of March 2014. The second phase of the contract involved carrying out valuations of the entities by end of June 2014. They agreed upon a contract price of $25 million, payable in July 2014. $5 million of the fee related to preliminary review and $5 million related to each second-phase review.
Illustrate revenue recognition in the given scenario and write down necessary journal entries.
Journal entries
Since the fee is payable after the completion of the contract, MAS will bill review by end of June 2014. In the meanwhile, in accordance with the matching concept, it has to accrue revenue at completion of each milestone.
The required journal entries are as follows:
- On completion of the preliminary study, MAS will record accrued revenue because the firm has completed its obligations under the first phase of the contract.
Accrued revenue $5 M Revenue $5 M - On completion of each valuation, revenue must be recorded
Accrued revenue $5 M Revenue $5 M - On completing the preliminary study and the four valuations, MAS can bill the government and record a receivable.
Accounts receivable $25 M Accrued revenue $25 M
by Obaidullah Jan, ACA, CFA and last modified on