Accrued Revenue (Unrealized Revenue, Accrued Asset) Explained
Definition, Meaning, and Example Transactions
Business Encyclopedia, ISBN 978-1-929500-10-9. Revised 2014-08-01.
The accrued revenue concept is one of several accounting conventions made necessary by the use of accrual accounting, in which revenues are recorded when earned and expenses are recorded when owed. Actual cash flow may occur at other times. Accrued revenues (or unrealized revenues, or accrued assets) are revenues earned by the seller for delivery of goods and services, for which the seller has not yet received payment.
• Accrued revenue (Accrued asset, Unrealized revenue) explained with an example.
• Accrued revenue: Prepayment and deferred payment situations.
– Prepayment (payment precedes delivery of goods or services).
– Deferred payment (delivery of goods or services precedes payment).
Accrued revenue (Accrued asset, Unrealized revenue) explained with an example
Suppose, for instance that a tenant renting floorspace from Grande Corporation has a monthly rent payment of $2,000 due on January 1, but that payment is not made then. By month's end, even though Grande does not have the rent cash in hand, Grande can still recognize the revenue as an accrued revenue. Grande company's bookkeeper could make journal entries including a debit to an asset account (a $2,000 increase in the rent receivable account) along with a credit to a revenue account (a $2,000 increase to the rental properties revenue account), as follows:
Journal for Fiscal Year 20YY
112 Rent receivable
Grande can recognize the rent due as an accrued revenue in this way because Grande believes the rent will in fact be paid (i.e., Grand believes the rent revenue is realizable).
Then, when the overdue rent is actually paid on, say, January 31 (after the revenue has been fully earned because the tenant occupied the floorspace for the month) the journal entries would likely include a debit to one asset account (increase of $2,000 to the cash account) and a credit to another asset account (decrease of $2,000 to rent receivable). The decrease (credit) to the asset account, rent receivable, indicates a decrease in total accrued revenues.
Accrued revenue: Prepayment and deferred payment situations
Accrued revenues (Accrued assets, or Unrealized revenues) are handled in accrual accounting in much the same way some other revenue and expense transactions are handled when there is a time lapse between two parts of a business transaction.
Accrual accounting incorporates the matching concept, the idea that revenues should be recognized in the same period with the expenses that brought them. Prepayment and deferred payment situations present a special challenge to the company's bookkeepers and accountants, because it is possible for actual payment and actual delivery to fall in different accounting periods. In order to avoid violating the matching concept, bookkeepers make an initial two entries to register the first transaction event, and then, later, make adjusting entries to register the second transaction event. For examples of journal entries for each kind of event, see the encyclopedia entries for individual terms, linked below.
Prepayment (payment precedes delivery of goods or services)
In the prepayment situation, customer payment precedes delivery of goods or services.
- From the seller's viewpoint: The seller will recognize unearned revenues (or deferred revenues) as revenues received for goods and services that have not yet been delivered. Unearned revenues are recorded as liabilities until such time as the goods and services are delivered, after which they may be recognized as earned revenues.
- From the buyer's viewpoint: The buyer recognizes deferred expenses (or prepaid expenses or deferred charges), when paying for services or goods before delivery. An inventory of postage stamps, bought but not yet used, is a prepaid expense. When taxes are paid in advance of due date, a prepaid expense is created. Prepaid expenses are recorded as a current asset until the services or goods are delivered or used.
Deferred payment (delivery of goods or services precedes payment)
In the deferred payment situation, delivery of goods or services precedes customer payment.
- From the seller's viewpoint (the subject of this encyclopedia entry): Accrued revenues (also called accrued assets or unrealized revenues) are revenues earned by the seller for delivery of goods and services but which the seller has not yet received. Accrued revenues may be posted in one asset account, such as accounts receivable, until the revenues are actually received. Then, the accounts receivable account (an asset account) is credited (reduced) while the another asset account, cash, is debited (increased).
- From the buyer's viewpoint: Accrued expenses (or accrued liabilities) are posted in the buyer's books as a liability, for goods and services purchased and received but not yet paid for. When workers are owed salaries or wages for work completed, but not yet paid for, the employer has an accrued expense. Interest payable for a bank loan can be an accrued expense. Accrued expenses are first entered in the journal as a liability until paid, at which time the liability account is debited (reduced) and an asset account, such as cash, is credited (decreased).
- Expenses are recognized when cash is paid
- Revenues are recognized when cash is received.
Deferred expenses (prepaid expenses, or deferred charges) along with the other prepayment and deferred payment situations described above, are used in accrual accounting but not cash basis accounting.
By Marty Schmidt. Copyright © 2004-.