Definition of Accrued Revenue

Accrued revenue is income that a company has earned but has not yet received payment for by the end of an accounting period. It is recorded as an asset on the balance sheet under accounts receivable, ensuring that financial statements reflect revenues when they are earned rather than when cash is received.

Accrued revenue is an essential part of the accrual method of accounting, which is required under the International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) in Canada.

For example, if a Vancouver-based consulting firm completes a project in December but does not receive payment until February, the revenue must be accrued in December when the work was performed.

Purpose of Accrued Revenue in Business and Accounting

Recording accrued revenue ensures financial accuracy and regulatory compliance, benefiting businesses by:

1. Recognizing Revenue on Time – Ensuring earned income is reflected in the correct period.
2. Matching Revenue with Expenses – Aligning income with the costs incurred to generate it.
3. Supporting Better Financial Planning – Helping businesses forecast cash flow and profitability.
4. Ensuring Compliance with Canadian Accounting Standards – Required for IFRS and ASPE reporting.
5. Facilitating Tax and Audit Preparation – Ensuring proper revenue recognition for Canada Revenue Agency (CRA) compliance.

Types of Accrued Revenue

1. Accrued Service Revenue

Revenue is earned from services provided but has not yet been billed or received.

Example: A law firm provides legal consultation in December but invoices the client in January. The revenue is accrued in December.

2. Accrued Interest Revenue

Interest income that has accumulated on loans or investments but has not yet been received.

Example: A Canadian bank earns $5,000 in interest on a loan in December but receives payment in January. The interest is accrued in December.

3. Accrued Sales Revenue

Revenue from goods delivered to a customer before payment is received.

Example: A manufacturing company delivers equipment to a client on December 20 but allows a 30-day payment term. The revenue is accrued in December.

4. Accrued Subscription Revenue

Income from subscription-based services that have been delivered but not yet paid for.

Example: A software company provides cloud services for December but bills customers in January. The revenue is accrued in December.

5. Accrued Rental Income

Rental income earned but not yet received from tenants.

Example: A landlord leases office space for December rent but does not receive the payment until January. The income is accrued in December.

How Accrued Revenue Works in Financial Reporting

1. Identifying Earned but Unpaid Revenue

Businesses review all services performed and goods delivered that have not yet been paid for.

2. Recording Accrued Revenue

Accrued revenue is recorded by adjusting journal entries in the financial statements.

Example of an Accrued Revenue Journal Entry (for services worth $12,000 provided but not yet billed):

Accounts Receivable 12,000

Service Revenue 12,000

3. Adjusting the Entry When Cash Is Received

Once the customer makes payment, the receivable is converted into cash.

Cash 12,000

Accounts Receivable 12,000

This ensures that revenue is recorded when earned rather than when payment is received.

Accrued Revenue vs. Deferred Revenue

Category	Accrued Revenue	Deferred Revenue
Definition	Earned revenue not yet received	Received payment for services not yet delivered
Financial Impact	Recorded as an asset (accounts receivable)	Recorded as a liability (unearned revenue)
Examples	Consulting fees, interest income	Subscription fees, prepaid rent

For example, accrued revenue applies to completed services awaiting payment, while deferred revenue applies to prepaid services not yet delivered.

Advantages and Disadvantages of Accrued Revenue

Advantages

• Ensures Financial Accuracy – Reflects real-time revenue earned.
• Improves Cash Flow Forecasting – Helps businesses plan for expected income.
• Required for IFRS Compliance – Necessary for accurate financial reporting.

Disadvantages

• Complex Revenue Tracking – Requires businesses to monitor outstanding receivables.
• May Overstate Financial Health – Businesses might record revenue without guaranteed payment.
• Requires Adjusting Entries – Businesses must update revenue records when payments are received.

Related Terms

• Accrued Revenue vs. Accounts Receivable: Accrued revenue is earned but unbilled, while accounts receivable is billed but not yet received.
• Deferred Revenue vs. Accrued Revenue: Deferred revenue represents prepaid income, while accrued revenue represents earned income awaiting payment.
• Matching Principle: Ensures revenues and expenses are recorded in the correct period.

Interesting Fact

Did you know? To ensure accurate reporting, many Canadian businesses automate accrued revenue tracking using accounting software like QuickBooks, SAP, or Xero.

Statistic

According to CPA Canada, over 85% of Canadian businesses using IFRS or ASPE recognize accrued revenue to comply with financial reporting standards.

Frequently Asked Questions (FAQ)

1. Why is accrued revenue important in accounting?

It ensures all earned income is properly recorded, improving financial transparency and accuracy.

2. How do businesses record accrued revenue?

They create adjusting journal entries at the end of an accounting period for unbilled but earned revenue.

3. Is accrued revenue required under IFRS?

Yes, all businesses following IFRS or ASPE must recognize accrued revenue for proper reporting.

4. What happens if a company does not record accrued revenue?

Financial statements will understate revenue, leading to inaccurate profitability analysis and tax reporting.

5. How does accrued revenue affect cash flow?

It represents future cash inflows, helping businesses predict when they will receive payments.