Accrued revenue refers to income that a business has earned but has not yet received payment for.
It’s commonly used in accounting, especially in service-based industries like SaaS, where services are provided before payment is made. Companies record accrued revenue as an asset on the balance sheet because it represents money owed to the business.
For example, if a SaaS company delivers a subscription service in December but invoices the client in January, the revenue for December is accrued. This practice aligns income recognition with the period when the service was performed, ensuring accurate financial reporting.
Accrued Revenue vs Deferred Revenue
Accrued revenue and deferred revenue are two sides of the same accounting coin but serve different purposes. Accrued revenue is money earned but not yet received, while deferred revenue is money received before the service or product is delivered.
Consider this example: a SaaS company offers annual subscription plans. If a customer pays upfront for the year, that payment is deferred revenue until the company delivers the service each month. On the flip side, if the company delivers the service but hasn’t yet billed the client, the income becomes accrued revenue. Understanding this distinction is crucial for accurate revenue recognition.
Recording Accrued Revenue
To record accrued revenue, businesses make an adjusting journal entry at the end of an accounting period. This entry typically includes debiting an asset account, like Accounts Receivable, and crediting a revenue account. This process ensures that the income statement reflects earned revenue, even if cash hasn’t yet been collected.
For example, if a SaaS company earns $5,000 in December for services billed in January, it records an adjusting journal entry with a $5,000 debit to Accounts Receivable and a $5,000 credit to Service Revenue. When payment is received in January, the company adjusts its records accordingly.
Accrued revenue is essential for businesses using the accrual accounting method, as it helps maintain accurate and timely financial statements. This practice ensures businesses can track their performance and provide transparency to investors and stakeholders.
