Accrued Revenue

When a business records sales without receiving payment for the goods or services sold, accrued revenue rises. This occurs when the business does not invoice the customer at the time of the sale.

What Is Accrued Revenue?

Accrued revenue in simple terms, is when a business sells its goods or services to the customer but does not expect payment at the time of delivery but in the near future. When an accrued revenue occurs, the company has to note two important dates – the first being the date at which the goods or services are provided to the customer. On this date, the business can record the sale in the sales account and can allocate the balance to the trade receivables account. Once the payment is received by the business, an entry in the cash/bank account is made and the amount previously added to the trade receivables account is then credited. 

Advantages of Accepting Accrued Sales

Many businesses accept credit sales mainly due to the fact that they may lose out on a lot of potential sales as numerous businesses look to buy on credit. This is because they do not have to pay instantly and thus get to deploy their capital in other places. Moreover, in several industries, the payment period is generally slow due to a number of reasons, such as low liquidity. Therefore, many businesses prefer to purchase goods and services on credit and many companies have to offer credit sales so that they do not lose such customers. Accrued revenue also helps the business analyze the long-term growth and profitability. 

Accrued Revenue vs Regular Revenue

The only difference between accrued revenue and regular revenue is if the payment by the customer was done immediately. If the payment was done immediately the accounting treatment would be fairly simple: The bank or cash account would be debited whilst the sales account would be credited. If the payment was not done immediately then there would be two entries:

  1. The first entry would be done at the time of the sale. This is due to two accounting principles which are revenue recognition and matching principle. Therefore, trade receivables account is debited and the sales account is credited. The sales balance would be seen in the income statement whilst the trade receivable balance would be seen in the balance sheet as an asset.

  2. The second entry would be recorded at the time of receiving payment from the customer. This is when the bank or cash account would be debited and the balance in the trade receivable account would be written off by crediting the account.