What is accrued revenue?
Accrued revenue is a sale that has been recognized by the seller, but which has not yet been billed to the customer. This concept is used in businesses where revenue recognition would otherwise be unreasonably delayed.
Accrued revenue is quite common in the services industries, since billings may be delayed for several months, until the end of a project or on designated milestone billing dates. Accrued revenue is much less common in manufacturing businesses, since invoices are usually issued as soon as products are shipped.
The concept of accrued revenue is needed in order to properly match revenues with expenses. The absence of accrued revenue would tend to show excessively low initial revenue levels and low profits for
a business, which does not properly indicate the true value of the organization.
Also, not using accrued revenue tends to result in much lumpier revenue and profit recognition, since revenues would only be recorded at the longer intervals when invoices are issued.
In order to record these sales in an accounting period, create a journal entry to record them as accrued revenue.
For example, ABC International has a consulting project with a large client, under which the consulting agreement clearly delineates two milestones, after each of which the client owes $50,000 to ABC. Since the agreement only allows for billing at the end of the project for $100,000, ABC must create the following journal entry to record reaching the first milestone: