Accrued revenues are revenues that have not been billed or collected during the accounting period. Two examples illustrate why revenues accrue.
Firstly, a company may have
performed services that have not been billed or collected. Service companies
usually bill their client or customers after they have performed their
services. These companies postpone revenue recognition until they obtain a right
to it (Revenue Recognition Principle). A second major example is interest
revenue from investment in debt securities. In this case revenue is earned with
the passing of time and for the sake of efficiency, is only recorded at the end
of the period. In these examples, companies have a claim on revenue but have
not yet to receive the monetary benefit. Thus, at the end of the period or
statement date, revenue is accrued in the form of an adjusting entry. A
receivable account is debited for the amount owed, and a parallel credit is
made to a revenue account.
Before this entry is made, both assets and revenues are understated.
Example:
Common Sources of Accrued Revenues:
- Services rendered
- Rent
- Interest