Definition of Accrued Revenue
Accrued revenue refers to the revenue which the company has earned by way of selling of goods or provision of the services, but the payment with respect to the same has not been received, i.e., it is the amount which the customers owe to the company against the good purchased or services are taken by them from the company.
Explanation
Accrued revenue is the income that is earned by the business from supplying of goods, providing of services, in the form of bank interest or other interest earned on investments, etc., but the cash against such income has not been received in that accounting period. When the accrual accounting method is followed, the revenue earned but not received in cash is also recorded in the books of accounts as accrued revenue. The example can be the accounts receivable where the debtors are recorded at the time of credit sales and not when the payment is received against such revenue, interest earned for the period but the billing and payment for the same is done at a later date, etc.
Examples of Accounts Receivables
Following are the accrued revenue example, which is given below:
Example #1
Accrual of Interest on Loan: A ltd is a loan providing company that provided a loan of $100,000 to S.As per the terms of the agreement, the tenure of the loan is of 5 years with an interest rate of 12% per annum. As per the policy of the A ltd, interest receivable on loan will be accrued every month, but the billing will be done at the end of the year only. In this case, what will be the journal entry that will be recorded in the books of account of A ltd every month for the first year with respect to the interest and entry for billing of the interest?
Solution:
Interest accrued per month is calculated as
Yearly Interest = Loan Amount * Interest Per Annum
- Yearly Interest = $100000 * 12%
- Yearly Interest = $12,000
Monthly Interest is calculated as
Monthly Interest = Yearly Interest / Number of Months in a Year
Monthly Interest = $1,000
| Date |
Particulars |
Debit |
Credit |
| Month-end | Accrued revenue A/c | $1,000 | |
| To Interest Revenue A/c | $1,000 | ||
| (Entry to record accrual of the interest revenue at the end of each month) | |||
Entry to be passed at the end of every year for billing interest
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|
Date |
Particulars |
Debit |
Credit |
| 01.05.2020 | Account receivable (S) A/c | $ 12,000 | |
| To Accrued revenue A/c | $ 12,000 | ||
| (Entry to record billing of interest revenue) | |||
Example #2
Continuous Legal Service: A Ltd received the contract from B ltd to provide continuous legal service for a period of three months for a particular project. As per the agreement, B ltd will owe $ 25,000 at the end of each month to A ltd amounting total of $75,000, but the invoice will be raised only after the completion of the project, i.e., at the end of the third month. Pass the necessary journal entries in the books of A ltd at the end of each of the three months.
Solution:
Entry in books of A Ltd
|
Date |
Particulars | Debit |
Credit |
| End of 1st Month | Accrued revenue A/c | $25,000 | |
| To Revenue from legal services A/c | $25,000 | ||
| (Entry to record accrual of the revenue at the end of the first month) | |||
|
Date |
Particulars | Debit |
Credit |
| End of 2nd Month | Accrued revenue A/c | $25,000 | |
| To Revenue from legal services A/c | $25,000 | ||
| (Entry to record accrual of the revenue at the end of the second month) | |||
Example #3
A company, A ltd, is involved in providing repairs and maintenance services to the plants and machinery of the cloth manufacturing industry. A ltd provided services worth $ 10,000 on the last day of the month of April -2020 to B ltd, but raised the invoices for the same after two days, i.e., on 02-May-2020. The company is following the accrual method of accounting. How will these transactions be recorded in the books of accounts of the company?
In this case, the revenue is accrued at the time when the services are provided to the customer, i.e., at the end of April-2020. However, the billing is done in the next month, and the payment is also received in the next month only. So, the following will be the journal entries in the books of A ltd.
|
Date |
Particulars | Debit |
Credit |
|
| Apr-20 | Accrued revenue A/c | $10,000 | ||
| To Service Revenue A/c | $10,000 | |||
| (Entry to record accrual of the revenue at the end of April month) | ||||
|
Date |
Particulars | Debit |
Credit |
|
| May-20 | Service Revenue A/c | $10,000 | ||
| To Accrued revenue A/c | $10,000 | |||
| (Entry to record reversal of accrual of the revenue in the previous month) | ||||
|
Date |
Particulars | Debit |
Credit |
|
| May-20 | B ltd. A/c | $10,000 | ||
| To Service Revenue A/c | $10,000 | |||
| (Entry to record issuance of an invoice in the may month) | ||||
|
Date |
Particulars | Debit |
Credit |
|
| May-20 | Cash A/c | $10,000 | ||
| To B ltd. A/c | $10,000 | |||
| (Entry to record receipt of payment in the may month) | ||||
Example #4
Y took the premises of X on rent. Rent for the particular month is to be paid on the 2nd of the following month. The monthly rental amount is $ 7,000. What will be the year-end entry for recording the accrual of the rent revenue in the books of X?
At the end of the year, only one month rent, i.e., last month rent, will accrue. Journal entry go record the same is as follows:
| Date | Particulars | Debit | Credit |
| Year-End | Accrued revenue A/c | $7,000 | |
| To Rent Revenue A/c | $7,000 | ||
| (Entry to record accrual of the rent revenue at the end of the year) | |||
Conclusion – Accrued Revenue Example
Thus, accrued revenue is the revenue earned during a period but without initially receiving the cash in return. The cash earned through such revenue is received on some later date in another accounting period but not at the time when the income is earned and is due to be received; then on such date, the revenue is recognized as accrued revenue like in the case of credit sales, interest earned which is to be received at a later stage, etc.
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